Fellow pedants may know that the corruption of the word Carillon was used to form the name of the demerged business coming out of Tarmac back in 1999. Hinting as it does at a peal of bells, the intention was to give Carillion a “clearly defined, separate identity, and to distance it from its construction roots”.
If distance was one of the main intentions then it certainly succeeded, having now disappeared altogether. Unfortunately for a lot of subcontractors caught up in one of the UK’s biggest corporate failures in recent years, the distance between their invoice date and likely payment date has also gone the same way.
At the time of the collapse it was estimated that there could be as many as 30,000 small businesses owed money on top of the 20,000 directly employed staff.
The numbers are quite frightening if a straw poll carried out by The Building Engineering Services Association (BESA) and Electrical Contractors Association (ECA) is magnified. Of the 133 companies contacted 80 of them were collectively owed £30m by Carillion.
For many small businesses the collapse will be devastating. The same poll indicated that firms with fewer than 10 employees were on average owed £98k with one staring at a whopping £250,000 loss. The averages rise in relation to the size of business with those employing 10 - 49 owed £141k and those employing 50 - 249 owed £236k.
Regardless of the size of these businesses, subcontracting to the massive corporate entities has always involved a level of forelock tugging whilst having to swallow some of the most laughable payment terms imaginable. Carillion was no different; pity the poor subby who pays his small team on a weekly basis but has to wait 120 days for his invoice to be paid. It is also highly unlikely that the same subby’s own trade suppliers would happily offer four months credit. It doesn’t take a rocket scientist to work out that the result is a painful cashflow squeeze.
There are reports that the more recent Carillion contracts were written on the basis of 65 day payment terms however there are also reports that, in reality, they still stretched to well over 90 days. All in all, that means three months of work, wages, and materials disappearing down the drain that is the Carillion collapse.
The tentacles of this beast obviously don’t stop at the door of the unfortunate subcontractor. Those that fail through no fault of their own will leave their own trail of unpaid supplier invoices for another sector of the construction industry to cope with.
Those choosing to struggle on in the hope of seeing it through will be facing a number of issues all connected to the fact that a large chunk of projected cashflow has suddenly vanished from the books.
For a start HMRC will continue to expect payment of due taxes, staff will expect wages and material will still need paying for despite some of it already being nailed to a wall at the behest of a company now in liquidation.
Balance sheets will also come under attack as possible WIP writedowns and bad debt numbers show a weakening position. And whilst this might not pose an insolvency risk it may well cast doubt in the minds of some important people who do actually take the time to read them.
For example, much needed additional finance may prove difficult to obtain if the numbers affect a company’s credit rating. Furthermore, depending on the size of the business, if formal tendering is part and parcel of the new business process the balance sheet is often used to gauge the stability of a potential partner.
Help for now
In the immediate aftermath the government did respond by providing an extra £100 million of funding via the British Business Bank and EFG scheme which offers guarantees to lenders when their clients might not have sufficient security to borrow on normal terms.
This offer came about shortly after a number of high street banks put forward their own proposals to stump up £225m of emergency support to help small business customers ride out the crisis, including waivers on overdraft fees and loan repayment holidays.
Ask an expert
Any subcontractors not qualifying for either of the above would be wise to seek the help of an insolvency expert. It’s worth remembering that these guys aren’t just there to put the final nail in the coffin of a failing business but are experts in turnaround and recovery too.
One of their skills is in negotiating with HMRC to establish a “Time to Pay” agreement. Pressing tax liabilities can be spread over a viable period easing the burden on cashflow whilst showing a willingness to pay. Simply ignoring the demands will quickly result in a winding up petition.
Similarly, if supplier payments are dwarfing current cashflow availability a more formal “Voluntary Arrangement” could be a consideration. If approved it provides a legally binding agreement with creditors and leaves a business debt free upon a successful conclusion.
Turnaround professionals also have an extensive list of contacts in the alternative finance arena that tend to look at funding from a different angle than the mainstream banks. It could be that there are a number of assets within a business that could be financed or re-financed providing vital cashflow.
With hindsight it should be easy to see how subcontractors could have done things slightly differently to limit some of their losses however the involvement of the government no doubt gave added comfort that they were dealing with a real corporate thoroughbred. After all, of Carillion’s £5bn annual contract revenue, £1.7bn (34%) was with the government. It’s easy to imagine the repeated response to subcontractors chasing for payment; “don’t worry about your money, after all the government is the end customer”.
Credit insurance (AKA bad debt protection) obviously comes with a premium but it is a great way of making sure invoices get paid. It is especially useful if, like a lot of smaller subcontractor business, a high percentage of turnover is tied up with one customer.
Once upon a time it would have been considered unnecessary to take out credit insurance on a supposed blue chip. However, since the financial crash plenty of familiar names have met the same fate as Carillion. Having said that, bad debt cover on Carillion would probably have been pulled months ago as the guys underwriting these deals tend to take a lot more notice of profit warnings and short-selling than the government clearly did.
It’s not easy for subcontractor businesses faced with the opportunity of large amounts of work from a huge well know firm. Short-term funding will always be an issue because there isn’t a contract in existence that will pay them weekly.
Going forward, recognising the warning signs is crucial. Two profit warnings in a year and payment terms being lengthened is a sign that cash is tight.
It is also worth keeping a close eye on the newspapers financial pages and even the annual accounts of large corporate customers. If they start struggling to settle a £10,000 invoice within 120 days but continue to pay over £1m in bonuses to directors (on top of over £2m in salaries) then something’s gone a little awry in the corporate governance department.