An important lesson for entrepreneurial business owners

This week the news has been dominated by the collapse of Carillion, which will have huge repercussions for not just the staff they employed but also the 30,000 smaller businesses that relied on Carillion for their income and survival.

There are a number of lessons entrepreneurial business owners can learn from this debacle that, like most business failures, could have been avoided.

But first I want to look at likely consequences of the collapse. Carillion has gone into liquidation, a process which is about recouping as much financial capital as possible.

Human capital is unlikely to be a consideration within the Liquidator’s brief, even though recouping funds to pay off the bankers who allowed Carillion to overreach itself will do little to help the economy.

Some 20,000 people worked for Carillion in the UK, 28,000 current and future pensioners relied on its pension fund and 30,000 small businesses are owed money by the organisation. According to one insolvency specialist the failure of Carillion will have a “serious impact on employees and its supply chain putting the financial future of many people and smaller businesses at risk”.

All the while the bankers recover their debts and the Liquidators, PWC, will earn their tens of millions.

What is far more important is that the skills of the workforce and small businesses that provided the services under the Carillion banner – largely for or on behalf of public services – are not lost. Many of those people could, and should, have been working in-house. The National Audit Office (NAO) recently reported that there was “little evidence that Government investment in public/private projects delivered financial benefits and that the cost of privately funding public [services] can be 40% higher than relying on Government money”.

There is no reason why schools and hospitals cannot run their own catering, repairs and cleaning: they did so for years and all have the scale to do so and an available supply of skilled workers. The consequences of outsourcing are now all too obvious and need to end.

Similarly the economy needs the people who worked on Carillon’s construction projects to still be working on them. We cannot afford to lose them or the capital invested in what they know, particularly at a time when so much needs to be done in the UK to transform the infrastructure and economy.

And there is another reason that behemoths like Carillion must not be allowed to grow. Of the small businesses facing major financial loss a good number will have been totally reliant on the business that Carillion generated for them. It’s an easy trap for business owners to fall into; the allure of one or two big customers is hard to resist, even though with a better structure those same businesses could have been doing the same work at the same price directly for the ultimate customer, but were denied the opportunity.

Herein, however, lies an important lesson for entrepreneurial business owners. The allure of those one or two big customers may give the illusion of security. But security over freedom, which many of us are programmed by our belief systems to value, is not fit for purpose as an entrepreneur and not conducive to entrepreneurial success. The mindset that values security over freedom prioritises activity (being busy) over growth (getting better). It is the mentality of an employee rather than the mentality of the entrepreneur.

The problem with security is that it promotes comfort and distorts reality. Just like many of the small businesses facing the consequences of Carillion’s collapse their demise was a train wreck in waiting.

But there is one even more startling revelation from the Carillion story – they didn’t know their numbers. As difficult as it may be to believe, it was revealed on Friday, that last summer Carillion called in their accountants, KPMG, to review their contract costings. This exercise revealed serious weaknesses in their costing systems which meant that they were actually losing money on major contracts without knowing it. Shortly afterwards, the CEO followed by the Finance Director were both sacked. (Exactly why KPMG who had been auditing Carillion’s books for nearly 20 years hadn’t discovered this earlier is a story for another time).

In a remarkable understatement, Professor John Colley, of Warwick Business School, said a key problem for the business was its accounting,

Now I know that I talk on a regular basis about knowing your business numbers. I do so for a reason: it is the single most important function in every business (up there with getting and keeping customers) and as Carillion proves it isn’t just small businesses that suffer from the problem and it highlights a really important point. It isn’t just any numbers (Carillion had plenty of those) it’s having the right numbers to measure accurately the performance of the business that matter.

There are a surprising number of businesses that have numbers showing they are profitable when in fact they are in financial difficulty. There is really no excuse for this, particularly amongst smaller businesses, provided they have implemented some proper (nowadays cloud-based) accounting software, shared this with their accountant and jointly agreed with their accountant the right numbers to measure accurately the performance of the business.

I have little confidence that anyone in Government will be thinking about these things (although I hope some business owners will) or that the long awaited and past due reform of the insolvency laws will happen anytime soon. What matters is that the skills of those running the public services are not lost, and maybe just a few may become the entrepreneurs of the future.

To your success

Noel Guilford

Noel Guilford, Principal at Guilford Accounting
Noel Guilford is the principal of Guilford Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the 'Figure it out - an entrepreneurs guide to understanding your business numbers' which you can obtain by visiting guilfordaccounting.co.uk.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ His latest book, How to Build a Successful Business' will be published in 2018.

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