Carillion PLC was a prominent British multinational construction, facilities management, and maintenance services company that operated for several decades. It was involved in a wide range of high-profile construction projects, including the construction and maintenance of schools, hospitals, and transportation infrastructure.
The Cash Flow Crisis
In January 2018, Carillion shocked the business world when it collapsed into compulsory liquidation. The company’s failure had a significant impact on the construction industry and sent shockwaves through the UK economy.
The key reason behind Carillion’s collapse was a severe cash flow crisis. The company had taken on numerous large-scale, long-term projects, which led to a significant cash outflow, often with extended payment terms from clients. At the same time, Carillion faced challenges in receiving payments on time, leading to an imbalance between its income and expenses.
Delayed Payments and Overextension
Carillion’s reliance on government contracts and the public sector further complicated matters. Delays in payments from these entities exacerbated their cash flow difficulties. Additionally, they had extended themselves into various areas beyond construction, such as support services and facilities management, which spread their resources thin and made it challenging to maintain focus on core competencies.
Lessons to Learn
For construction companies and our valued clients, the collapse of Carillion serves as a stark reminder of the importance of prudent cash flow management:
1. Diversification with Caution: Expanding into new markets and services can be lucrative, but it must be done with caution and careful consideration of the impact on cash flow.
2. Contractual Safeguards: Negotiating favourable payment terms and having stringent contractual safeguards in place can help reduce the risk of delayed payments and protect cash flow.
3. Continuous Monitoring: Regularly monitor cash flow, and project financials to identify potential issues early on and take corrective actions.
4. Cash Reserves: Building and maintaining adequate cash reserves is crucial for handling unexpected events or delays in payments.
5. Professional Financial Advice: Engaging the services of a reliable accountancy firm can provide valuable insights, strategic planning, and financial advice to support your company’s financial health.
We are committed to helping your construction business thrive by providing expert financial guidance and support in navigating the complexities of cash flow management.
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