Although external factors do play a part in the success or failure of a business, research shows that internal factors such as the quality of management is far more important.
The report prepared by the Australian Securities and Investments Commission (ASIC) on the reason for company failures has consistently concluded that the major reason for company failures is “poor strategic management “. The second most common reason cited for business failure is a failure to maintain proper books and records. This of course can be seen as one in the same as bad strategic management.
In June 2013, Jones Partners commenced a major research project into the state of the Australian Economy, Businesses at Risk and Insolvencies. At a function announcing the launch of this project, Mr Phil Ruthven Chairman of IbisWorld, drew some interesting conclusions. Refer to the video on an excerpt taken from the presentation.
Many economists consider that the Australian economy is in reasonably good shape. Clearly interest rates are low inflation appears to be under control and growth appears to be positive. Notwithstanding these happy statistics company liquidations continue to rise and Personal Bankruptcies remain at record high levels. Factors other than general economic conditions are clearly very relevant.
The ASIC report also demonstrates that the vast majority of company liquidations relates to small independent family owned businesses. In particular, 81% of companies that failed had less than 20 employees and 85% had less than $100,000 in assets. The small business sector is clearly under the most pressure at the present time and the major risk factor is the quality of management. The components of good management are not well defined particularly with reference to the small business sector. However, it is my belief that it is the personality drivers of individual business owners that defines management.
Economist Chris Nadarajah has been commissioned by Jones Partners to oversee this project and his report will be presented at a function to be held at the Institute of Chartered Accountants Australia on 29 July 2014. If you are interested in attending this meeting, please feel free to contact me.