What Can Business Start-ups Learn From The Carillion Collapse?
When Carillion entered liquidation in January 2018 over 30,000 businesses were left owed over £1 – billion. It is likely that many of those businesses, which will include start-ups and other small enterprises will also fail because they can not survive without the money owed to them by Carillion.
There are many lessons that can be learned from the Carillion catastrophe both in terms of how a business can come to the point of failure as happened here and how to manage one’s business to survive a failure from a large client.
Survive The Loss Of A Major Client
- Firstly, look at your overall business. Don’t let other business suffer because of the loss of one major client because you will depend upon them for your future survival.
- Check whether you are entitled to suspend contracts if there is an insolvency either up or downstream in the supply chain. You might get an early warning of upstream issues and act to protect your business. Downstream you might be able to suspend work and expenditure, upstream you can act to protect stock and other cost items.
- Make sure that you keep good records to protect yourself in the case of disputes or liquidations.
- Control your debtors: many businesses use their suppliers and sub-contractors as a form of free banking by delaying payment for as long as possible. Carillion was renowned for this; delaying payments to suppliers for as long as 4 months. Late payment affects your cash flow and thus the viability of your business.
Don’t Do What Carillion Did!
The Carillion case is a complex one and it may involve shady dealings by the company, however, they also made errors that provide points of learning for any start-up, indeed any business.
- Loss of focus: Carillion had engaged in a policy of chasing money wherever they thought they could see it. As a result, the business had many different areas of operation ranging from construction to facilities management, healthcare, energy efficiency, oils extraction services. To further complicate matters the businesses were geographically diverse rather than regionally focused. Many small businesses fall into the same trap of chasing money whereas the longer term, sustainable strategy is to focus upon a clearly defined niche and to work only on profitable projects
- Poor cash flow: Cash flow is the life blood of a business. If all else is working well but not enough cash flows into the business, then it will fail. Carillion’s problems, in part, arose from taking on projects that could not be profitable. This meant that cash flow was inevitably poor. To ‘fix’ matters, the business sought out new revenue sources but due to poor management and lack of focus, the new projects were also liable to be unprofitable. By focusing upon revenue rather than profit the company was bound to be starved of cash. The big lesson for start-ups and other small businesses is to only undertake work that can be reasonably expected to be profitable.
- Fantasy management: Keep it real. After Carillion entered insolvency it became apparent that the senior management of the business had not had a good grip upon reality. They had engaged in falsification of records, misled suppliers, and clients, and most importantly, misled themselves. The company had been in serious financial trouble for several years, but the company accounts had misrepresented the reality of the business. If your business is to thrive it can only do so based on good quality management information and a firm grounding in reality.
Carillion’s failure was a failure of many elements, not all within the company, however, if your start-up is to succeed, it can only do so by the things you do within your own business. Avoid these unforced errors and your business is more likely to succeed than Carillion did.