Small businesses face biggest insolvency risk: Study

Around 81% of Australian companies that collapsed in 2012-13 had fewer than 20 employees, according to a study released today. 

While insolvencies have dropped by 19%, the Insolvency Report 2014 shows around 10,000 businesses and more than 30,000 individuals still enter some form of insolvency administration every year.

The report, commissioned by Jones Partners and based on analysis of Treasury, bank, economic and industry insolvency data, shows SME collapses resulted in the loss of more than 74,000 jobs in 2012-13.

In comparison, larger collapses of companies with more than 200 employees resulted in around 6250 job losses.

Michael Jones, managing principal at Jones Partners, told SmartCompany while mainstream media often focuses on larger collapses, SME insolvencies have a far greater impact on unemployment.

Jones, who has managed insolvencies for more than 20 years, says the SME sector is always hardest hit by insolvencies because it is the area of the economy that takes the most risks.

“That’s where innovation and enterprise happens,” says Jones. “This is where rags-to-riches tales are, where the dynamism is in the economy.”

The report shows the four major reasons for SME collapses are bad strategic management, cash flow, lack of profit and failure to maintain books and reports.

But Jones says these causes all boil down to management issues.

“These are companies with less than 20 employees,” says Jones. “We’re not talking about corporate Australia with chairmen and financial officers. We’re talking about a guy who runs a crane with five guys working for him.”

“In SMEs you cannot separate ownership from management. If you have bad management, you generally can’t sack the managers because they’re the owners. You have to change their style of management or get them out of management.”

Jones believes there are several key personality drivers SME owners need to have to succeed and avoid insolvency, including a positive approach, good priority management skills and an understanding of presentation.

He says the statistics show a consistent trend over a long period of time and he expects little to change in the future.

“Successful SMEs become big corporate enterprises,” says Jones.

“It’s a bitter pill to swallow but, all the good stuff that comes with innovation, there is a price to pay for that.”