Professor Scott Holmes discusses the merits of CPA Australia's latest study on small business risk.
Inadequate access to necessary finance has long been discussed as a serious disadvantage under which small enterprises must establish and operate. A significant factor impacting on the flow of funds to the small firm sector is the widely held perception that small enterprises are inherently more risky than large enterprises. However, despite the popularity of this view, there is little if any evidence to actually support it. Nor is there any basis on which to compare the relative risk of investments within the small enterprise sector.
While there is a significant amount of information available about listed firms, which allows for risk calculations and comparisons, there is no existing dataset that allows for a review of risk in small firms, either by industry or across time. Given the important role that small firms play in job creation and value-added activity within the economy, there is still very limited understanding of the financial character and structure of small firms and how these factors relate to their relative success or failure.
The development of a large-scale dataset of small firm financial information will provide a number of benefits. It will support the development of a relative risk model which will increase understanding of the relative risk (and returns) from investment in the small business sector. It will provide information to assist accountants advise clients on both business performance and investment decisions and also provide information to assist lending institutions evaluate applications for finance from small enterprises. It will allow the development of performance benchmarks, which will assist in evaluating performance within the sector and industry sub-sectors in which small firms operate, across a range of factors such as size, business age, industry sector and ownership structure.
CPA Australia is sponsoring a national study of small enterprise risk that involves the development of the large-scale database required to build readily accessible relative risk index and performance benchmarks. The development of the database will require the support of practising accountants who register with the project and contribute data for small enterprise clients. Measures will be taken to ensure the anonymity of the client.
The importance of the project has been recognised by CCH Benchmarking which already has a relationship with many CPA practitioners, providing benchmarking data. CCH Benchmarking will provide data processing and financial support for the project. The data collected will add to the existing CCH Benchmarking database.
This benchmarking activity will provide industry-based financial information that will provide feedback on performance, profitability and relative risk, and will assist practitioners in advising small firm clients. The data will enable firms to see how other firms in their industry are performing and assist in identifying areas for improvement. The risk data will be particularly useful for firms considering moving into a new business sector, acquiring another business in the same sector and to accountants in providing advice on risk or return ratio.
Practitioners will be invited to register and provide data against a data collection pro forma. This initial dataset will form the basis of the development of the relative risk index and performance benchmarks. Participating practitioners will receive benchmark reports and access to the risk index.
Ultimately, it is hoped to expand the database to over 15,000 firms.
Practitioners who are interested in registering for the first phase of data collection should contact Judy Hartcher, CPA business policy adviser on +61 3 9606 9808.
Further reading
Measuring financial risk to allow SME access to debt/equity capital
CPA Australia small business survey program: perceptions of risk, CPA Australia small business survey program, August 2002
More bank for your buck by Jonathan Morris, Business Review Weekly, volume 24, number 18, May 9, 2003, pp 32-34
Small businesses built to last: a practical guide to building a sound, financially robust enterprise by Philip and Sandra Webb, Prentice Hall, 2002
'When the going gets tough' by Judy Hartcher, Australian CPA, volume 71, number 2, March 2001, p 42
This article was written by Professor Scott Holmes FCPA, director of the Graduate School at The University of Newcastle.
