Why is risk-taking and entrepreneurship important to the Australian economy?

10/12/2014 by Michael Jones

Risk is essential to the business environment. Entrepreneurship relies on creativity and imagination but with every new endeavour comes risk. The usual paradigm is that there is a direct relationship between the level of risk and return or profit attributed to that activity.

The Jones Partners’ economic research project into small to medium business (SME) Insolvencies in the Australian economy looked at the impact of risk and risk-taking on entrepreneurship. The attached video excerpt tries to answer the question -why is risk-taking and entrepreneurship important to the Australian economy? And provides an interesting narrative commentary on this issue

Most new ventures carry with them an elevated level of risk. Furthermore it is the small to medium (SME) sector that carries most of the risk burden within the Australian economic environment. It is therefore no surprise that this sector necessarily has the highest levels of insolvencies. Company Liquidations and Administrations including Voluntary Administrations and Deeds of Company Arrangement are disproportionately represented in small to medium (SME) sector. This however should not be necessarily be seen in a negative light

If we accept the value of entrepreneurship and risk-taking to the Australian economy then we must accept the consequences in terms of potential business failure.

At the present time however there appears to be a much greater cloud on the horizon. Recent observations indicate that Australian small to medium (SME) sector business leaders are becoming increasingly risk averse. Moreover it is becoming apparent that consumers themselves are becoming more cautious. In relation to consumers in particular we are observing and increased conservatism in the use of consumer credit as a consequence (having regard to the fact the Personal Bankruptcies have a direct relationship to the volume of consumer credit) Bankruptcies are for the first time in a decade levelling off and there is some indication that they may be in decline. This is not as a result of a more favourable Australian economic environment but rather the reluctance of consumers to borrow money.

In relation to the business investment there is a similar level of conservatism. Banks are reporting difficulties in finding suitable prospects and there has even been some recent evidence that in relation to the public company sector corporations are adopting a more generous dividend policy and in some cases even returning significant amounts of capital to shareholders. In short the corporate sector is saying to investors “we can’t find enough investment opportunity to use your money”

Jones partners have embarked on an economic research project that will see an annual report on the state of the Australian economy with respect to the level of insolvencies. The initial report was launched in July 2014 and made a number of key observations in relation in particular to the small business sector of the market

One relevant, if not obvious, observation is that the level of insolvencies does have an inverse relationship to Australian economic activity however there appears to be an important complicating factor. The number of SME insolvencies also has a direct relationship to the overall number of small to medium (SME) sector businesses that exist in the economy. When the economic mood is one of caution and when investors are reluctant to take risks economic activity will slow. There will be fewer new ventures. As a consequence it is possible to observe a reduction in the SME insolvency numbers whilst at the same time economic activity is subdued

These Australian economic indicators are being further research is part of the Jones Partners Economic research project which is aimed at enlightening the professions and business leaders on the impact of insolvencies have on the broader economic environment.

Jones Partners is keenly interested in investigating these issues .Jones partners specialises in providing professional advice and practical solutions. We can advise on a range of solutions that assists companies in difficulty Including Voluntary Administration, Receivership and various forms of Liquidation. In relation to personal insolvencies Jones partners has 4 registered Bankruptcy Trustees who are extremely active in assisting individuals resolve their personal financial difficulties using various parts of the Bankruptcy Act including Part 10 (Personal Insolvency Agreements) and Annulments pursuant to section 73 Of the Bankruptcy Act.