Large companies embrace risk management and it is core to their business – I don’t believe that small companies have done the same. They should.

Despite varying statistics, some of which are challenged as “gross exaggerations” it is clear that small companies do fail. What are the causes and can they be prevented, or the impact reduced so that it may not cause the business to go under?
The Australian Securities and Investments commission found:

  • 44% failed due to poor strategic management
  • 40% failed due to inadequate cash flow or high cash use
  • 33% failed due to trading losses

Some obviously fail for more than one reason

The first reason contains factors that vary with types of business. Factors identified include deficiencies in: experience, knowledge, location, strategic thinking, cash flow planning, management systems, business case / goals, quality,  etc etc). These are important.

The other reasons described are in fact not the root causes. I do not believe that small businesses think about the process that a cause / hazard / risk source may lead to an event with unwanted consequences, which we may or may not have thought about – and if it does, how do we react to limit the damage? For example – a power surge could knock out your computer system. The cause can happen. Surge protection can be installed to prevent the cause creating the event (knock out computer system). If surge protection wasn’t effective, full data/software backup will assist to minimise the impact. Perhaps backup hardware as well, or you may just decide to buy it if you need it and suffer a (short?) business interruption. It’s up to you.

Another example: consider that with large organisations, the sudden unavailability of a particular person rarely if at all leads to the demise of the business. Small organisations are much more exposed. What if your key revenue earners numbered (say) five people. Loss of any one of the five may seriously compromise the ability to continue with the capability required……what then?

The analyses provided by the various expert organisations in reality often only describe the consequences of an event that lead to the trouble. What were the causes? For example: “cash flow was a factor in 41% of businesses which became insolvent”. Why? What caused the cash flow imbalance?

Small businesses need to consider that there is a cause and effect process that needs to be understood. A cause “may” (implies a chance or probability) lead to an unwanted event (for example, loss of a contract). The impact or consequence may vary considerably depending on factors that could include: liability exposure due to loans, reliance on suppliers, employee numbers, industrial relations issues and so on. The consequence could be minor to major, which will need defining for each business. Controls can be identified that can work to prevent the event, or limit the damage if it did occur. This is risk management.

Why don’t small businesses spend time (and some expense) to take steps that would reduce the chance of business failure? Like their larger counterparts. It could save your business. Call us +61 3 9844 0040