The news came through on Monday morning that rather than going through administration – the process where a company continues to trade until a new buyer is found – Carillion would instead, go into liquidation. It is estimated that over 30,000 small businesses have been impacted with over £1bn owed, many of them face an anxious wait to see if they are eligible for Government support but mostly they face an uncertain future where no amount of trading could help the businesses cover the cash blackhole they face.
Last-ditch talks, potential Government intervention and pleas to the banks ultimately could not stop what had begun last year when Carillion’s share value plummeted and the chief executive stepped down. Muted as the UK equivalent of the US Enron scandal, Carillion fell foul of underperforming contracts and an overextended debt position. By the end of 2017, Carillion had issued three profit warnings in the space of five months, saw 90% wiped off its share value and had over £900m in debt, there was no other choice but to bring in the administrators. The recriminations, of course have already begun and while it will take time for the dust to settle and inquiries set up to find out what exactly happened our attention must be drawn to the thousands of suppliers who form part of Carillion’s supply chain.
Alarm bells should have rung years ago when back in 2013 lobbyists asked the Government to exclude Carillion from future contracts because of its treatment of smaller suppliers. That also year saw Carillion partner with Santandar, RBS and Lloyds Bank to provide an early payment scheme which saw payment terms extended to as much as 120 days.
When used correctly, early payment schemes are a powerful tool to manage working capital for the benefit of both supplier and buyer, but Carillion’s scheme has long been criticised because Carillion had failed to agree invoices or pay them quickly. Furthermore, the scheme was only available to a fraction of Carillion’s 20,000 plus suppliers but nearly all were subject to the 120-day payment terms. This failing to comply with the spirit and terms of an early payment scheme put pressure on already struggling suppliers.
In our experience, early payment schemes optimise a buyer’s working capital position but not to the detriment of suppliers. In fact, a good scheme will accomplish this as well as bolster a supplier’s access to liquidity at rates that are affordable and fair. These schemes are far more successful because both parties form a partnership where cash positions are strengthened and supply chain health is enhanced.
Currently, Carillion has 450 key UK public sector contracts extending from transportation to hospitals to education and defence. Flagship infrastructure projects such as HS2, the Battersea Power station redevelopment and the extension of Anfield football ground have thousands of British suppliers feeding into them all of whom face a very unsure few months.
Whilst the saga of Carillion will run for a little longer there is a key lesson we can learn. Early payment schemes when done correctly are an excellent option to improve a businesses working capital and the positive benefit to suppliers is the easy access to liquidity when it required. This creates a win:win for both parties leading to healthy sustainable growth.