Steve Larkin

Learning lessons from the collapse of Carillion

There have been few more high-profile stories so far in 2018 than the demise of Carillion.

The fall of such a big player has understandably made headlines, and has also had a big knock-on effect on small firms involved in the construction industry who are now left to question how much – if any – of the money they are owed they will actually get.

However, rather than spending all of our energy pointing the finger of blame at the directors and decision makers, I believe it’s far more useful to look beyond the headlines and understand precisely what has happened and why it has resulted in the firm’s collapse.

Whenever there is a situation like this – in any industry – there are fundamental lessons for all firms to learn. With Carillion in particular, there are some key points that small businesses need to apply to their own firms in order to ensure they are best placed to thrive in the future.

Perhaps the biggest fundamental mistake that Carillion made was ignoring the importance of cash flow. By the time it collapsed, its cash reserves were nowhere near sufficient for its various commitments.

For businesses of all sizes, cash is king, but cash flow is arguably even more crucial for small businesses. The simple fact is that if you don’t have the funds in place to cover paying for your various tradespeople or those new windows, then you risk the whole project grinding to a halt.

Those continued delays that you haven’t budgeted for can swiftly become incredibly expensive, making the difference between a project being profitable and one in which you end up losing money.

So, put cash flow at the very centre of your business plan. The Federation of Small Businesses argues that simple steps such as ensuring your invoices go out on time and maintaining communication with suppliers and clients can make a big difference.

It is also important to focus on profitability in every project you take on.

As all developers know, circumstances can swiftly change, turning that small profit into a loss. While, generally, larger firms may be able to absorb a few projects going awry like this, such a change can be far more damaging to a small business.

So, do your due diligence, do those sums and make sure you have a firm grasp of the financials of your project well in advance. Be sure to work out a worst-case scenario, too: will you still end up in the black if the weather is terrible? If there’s a sudden shortage of a material you need? Or if you don’t manage to sell the property swiftly?

If the sums don’t add up, if it’s all too easy for a project to go from being profitable to making a loss, then steer clear. Small developers need to focus on the guaranteed wins rather than taking a punt on every potential project that comes along.  

Finally, don’t overstretch yourself. It’s easy for a small business to get carried away, to take on whatever opportunities seem to come their way even if they are already committed to a separate project. This is unquestionably a mistake.

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