Carillion, cashflow and chasing payment

While many of us were stunned at the collapse of Carillion, the UK’s second biggest construction firm, which has put thousands of jobs at risk, there were others who saw it coming. But the signs were there for all to see: three profit warnings in five months; hedge funds shorting Carillion shares, betting the firm would hit trouble, before the profit warnings; spiralling debts reaching £900m between last September and this month; a pension deficit of £990m; and the Federation of Small Businesses complaining that subcontractors were being made to wait 120 days to be paid, double the generally accepted 60-day maximum. And all the while directors of Carillion commanded salary packages at complete odds with company’s performance.

After the subprime mortgage crash of 2007 which triggered a global financial crisis, you would think this kind of carelessness could not happen again yet, after the first profit warning last July, Carillion was awarded more government contracts, totalling £1.3m. It didn’t stop the rot though and it’s thought that around 30,000 small business are owed money by Carillion, and the chances of getting anything back are remote.

But the lessons that should have been learned by large corporations, are the ones many of us know only too well – cash is king. Always has been, always will be. It pays the salaries, interest and tax. And, when cashflow is so severely restricted and margins thin, as they were with Carillion, subcontractors have to make a judgement call; do you continue and hope for the best or do you cut and run? Shaun Weeks, Managing Director of contract cleaning company, Paragon Services, did neither. He was owed just under £12,000 by Carillion from July 2017 and had heard that the company was struggling. He wasn’t going to take on any more contracts, but he wasn’t going to give up on what Paragon was owed either. Between July and December his Financial Director, who spends around 60% of her time chasing payments, chased Carillion hard. She phoned and emailed constantly and only stopped in December, when £9,700 was deposited in the account. Weeks believes his company was one of the last to be paid by Carillion before it.

The moral of this story is to keep your ear to the ground and your eyes on share price, because there will be signs. If payment is taking too long – a sure sign that there are problems – re-examine your own payment terms. Why not get paid upfront? It may not be the industry norm, but you could make it yours. And keep chasing payment so it’s ‘easier’ for your client to pay you than ignore you, a fact that employees of Paragon Services all appreciate.