Carillion – How to fix the “ Hole “ in Cash Flow ?

Various media sources are estimating the number of sub contractors who may suffer bad debts and a cash flow hit as a follow on from the Carillion liquidation in the range of 20,000 to 30,000 businesses.
It is very clear that sub contractors anywhere in the Carillion supply chain will need to manage their cash flow very closely and very carefully over the months ahead.
The purpose of this article is to offer some practical suggestions to business owners….. ( who don’t have financial management expertise available to them on a day to day basis )….. on how they might go about fixing the “ hole “ in their cash flow which would result from a Carillion related bad debt.
What to Do
Most of all, try to keep a clear head and focus on the “ big picture “. You need to get very realistic about your financial position and immediate cash flow…………..FAST !
I’d suggest the priorities are to :-
1. Be able to continue paying employees and suppliers then ……
2. Work back towards the business level which existed prior to the Carillion “ shock “, then……..
3. Keep growing beyond that point …………( businesses don’t stand still they either develop and grow or they slip backwards and wither over time ).
You’ve probably heard the saying…………turnover is vanity, profit is sanity and CASH IS KING…….. the truth in that saying is going to be brought home very sharply for many Carillion subcontractors in the months ahead.
You will have a “ hole “ in your future cash flow to the extent that you suffer a bad debt related to Carillion.
The harder it was to “ make ends meet “ on cash flow prior to the Carillion “ shock “ the more urgent it is that you fix that Carillion related “ hole “ in your cash flow and that you fix it fast.
How big will your cash flow “ hole “ be ?
Many media sources are reporting that Carillion were taking up to 120 days to pay their sub contractors. Add in say 30 days of work in progress and the potential “ hole “ in cash flow is up to 5 months worth of Carillion related work/sales …….keep in mind that all of the costs incurred in doing that work will still need paying.
So the cash flow “ hole “ could be very big for some sub contractors
AND
that’s before we think about the issue of retentions.
Worst Case Scenario ? – Liquidation ?
Be very clear that if your business was to be unable to pay its bills as they fall due then company liquidation is a real possibility.
A liquidator’s first priority is the CREDITORS of the business.
Indeed the law of the land says that the liquidator of a company has a responsibility to :-
• Realise the assets of the company for the best possible price
• Distribute those proceeds among the CREDITORS in a strict order of priority
NOTE – There is no mention of the business owner. As far as a liquidator is concerned the owner will be at the very end of the queue.
On a liquidation it is very likely that the company’s liabilities will exceed its assets so there would be nothing left for the owner who stands at the end of the queue, who has lost his/her business and who has lost his/her livelihood.
If the business owner has signed personal guarantees his/her personal financial position on a liquidation of the company is likely to be even worse. Accordingly from the business owner’s point of view it is vital to protect the underlying business and thus his/her future livelihood……………you need a plan to protect the financial well being of you and your family
To many, the above will sound very negative …………You don’t know me but I’m an optimist ……AND a realist.
I believe when hard times come it is right to be optimistic and give 100% effort to make sure that a liquidator’s shadow never darkens your door. For sure be optimist but it is also vital to know the potential downside…… that way I hope a business owner will be able to :-
• Minimise his/her financial damage
• Create a platform to maximise future opportunity for the business owner and his/her family
Surviving that Cash Flow “ Hole “
The obvious options are :-
*Obtain more funding
*Get more sales
*Cut Costs
The right solution for your business will probably be some combination of all three.
Obtain More Funding
It has been widely reported in the media that the banks are ready to offer “ support “ and it is good to know that support is potentially there for you.
However there are no free lunches !
Banks charge interest on money lent AND they want their lending repaid.
AND
Banks generally take security when lending to small businesses.
I make no apology for stating the obvious facts above. You need to be fully aware of the interest rates you will be charged, repayment terms and security required ( bank overdraft facilities are likely to involve a personal guarantee from the business owner ).
I’ve been advising independent business owners for over forty years and it is a sad fact that sometimes personal guarantees do get called up by the banks and often creating substantial personal financial hardship in the life of the business owner………..you need to be very realistic about your potential personal risk when giving a personal guarantee.
So on “ support “ from your bank, while it’s good to know it’s there I’d only want to use it to the absolute minimum extent.
Be very careful about running up additional bank overdraft liabilities ( likely attracting further personal guarantee exposure on the business owner ) in order to pay unsecured liabilities e.g. pressure from HMRC on VAT, PAYE and corporation tax liabilities.
The recurring theme that I want to get across to you is that ACTIONS have CONSEQUENCES. I just want to help business owners get a clearer understanding of the potential consequences of the various actions they might take to resolve financial difficulties resulting from a Carillion related “ hole “ in their cash flow.
Get More Sales
There will likely be many Carillion sub contractors thinking the same thing. You need to be very aware that this will not be an immediate “ fix “.
It will take time to generate those sales, do the work, bill it and then get paid. Furthermore there will likely be costs to pay out before that additional sales monies are banked……..it might be that “ Get More Sales “ will worsen short term cash flow !……..be aware of this……..regularly forecast your cash flow AND regularly compare your actual bank balance to the bank balance per your forecast.
Also be aware of the temptation to take on sales with too fine margins just to try to “ keep the show on the road “…………that could be a formula for more trouble further down the road.
I’m not saying that “ get more sales “ would not be a valid strategy. I am simply saying that to the extent that you go down that route go down it with your eyes wide open AND monitor movements in and the overall trend of your cash flow on a very regular basis
Cut Costs
You must immediately take a serious look at all of your costs both in terms of direct labour costs, salaries costs and all overheads.
Nobody wants to see good hardworking people lose their livelihood but for many Carillion sub contractors there are going to be some hard decisions to be made in the coming months……e.g. is it better to let five people go now rather than many more later.
A potential danger of the “ support “ proposed by the banks is that a business owner may burn through that “ support “ hoping for the best rather than making hard decisions with urgency…… business owners need to be very aware of this potential danger

How to Closely Control Your Cash Flow
1.Prepare a Cash Flow Forecast for the next four weeks as a minimum AND as each week passes add another week to your forecast so that you are always forecasting at least four weeks ahead.
2. Keep a separate Cash Flow document/spreadsheet on the actual cash flows ( in and out ) for each week.
3. Compare the actual to the forecast numbers at the end of each week. Pay particular attention to the forecast bank balance at the end of each week compared to the actual bank balance at the end of each week.
If the actual cash flow results are trending worse than the forecast then alarm bells are ringing loudly.
In that scenario “ cutting costs “ is going to fast become a necessity.
In Conclusion
I hope that some of my thoughts and observations may help some of those business owners who are in the Carillion supplier chain and who are perhaps feeling a little bit lonely and vulnerable at the moment.
A key tool in helping you to manage your cash flow is going to be AN EFFECTIVE CASH FLOW FORECAST.
If you’re not sure of the best way to set up a Cash Flow Forecast then I’ll be happy to send you across the skeleton of a Cash Flow Forecast that has served me well over many years. You can get in touch with me as follows :-
Email : jim@jwmbusinessadvice-accountancy.com
Phone : 0141 -280 – 0404 ( after midday until 8pm is usually best for me ).
Jim Moore