No one likes nasty surprises. And that aversion is even more understandable when you’re a supplier, customer or employee who has been left in the lurch by a contractor that has called in the administrator.
To give an idea of scale, out of the thousands of business failures last year 22 UK medium contractors went to the wall with a combined turnover of £1.2bn. To put that into context it’s a figure remarkably close to that of Carillion plc’s annual sales just before it collapsed. While a drip feed of smaller insolvencies may go unnoticed by those not immediately affected, their combined impact upon the construction industry is just as significant.
Whenever businesses fail, it’s natural to want to identify the culprit who pushed them over the edge, and often it’s the banks that are portrayed as the prime movers. Typically, lenders are accused of pulling the financial plug just as the company is expanding into new markets or in need of greater investment to buy additional stock.
It’s a story I’ve heard first-hand at least a dozen times during my forty years in the construction sector. ‘If only those faceless bean-counters at the bank hadn’t called in their loan we’d still be here’, is the common retort from beleaguered bosses facing cashflow issues. While I’m no fan of the banks, I think it’s naïve to expect them to act as open-ended cashpoints for businesses. In my experience banks are like every other company – their number one priority isn’t you, it’s their shareholders. And if your business is viewed as a potential risk to the bank’s profits, it should come as no surprise when they ask for their money back.
Bashing the banks might be very therapeutic but it won’t stop more contractors going out of business. What the UK construction industry needs is better management, with the tools to smooth the rocky road that is today’s credit management.
In an ideal world, responsible management teams should never get to a precarious situation whereby they’re reliant on the bank’s finance. It’s not easy but cash reserves should be built up in good times so that down turns (or paradoxically periods of growth) can be managed
Likewise, investment in bricks and mortar, plant and other assets is another way of – no pun intended – fixing the roof while the sun shines.
This is all well and good in principle but hard in practice. That’s where outside help comes in. I understand that management can be a lonely and isolating job. But it need not be if you share the burden with your senior team, which should include non-executive directors who can bring fresh ideas, new perspectives and invaluable insights to your business.
Late payment is another contributing factor to many contractors’ early demise. I agree that if everyone in the supply chain just paid on time, far fewer smaller businesses would go out of business. There’s a private members’ bill – proposed by Lord Mendelsohn – doing the rounds at Westminster that proposes to limit all payment terms to 30 days. This would help, but experience tells me it’s unlikely to make it to the statute books.
Call it tough love but contractors and suppliers alike need to be more careful when it comes to finance. Granted, every business needs external investment at times to facilitate growth. However when we get to a point where we rely solely on these facilities, we risk the future of everything we’ve worked for.
This article appears in Construction News