SMEs urged to consider diversification as key business strategy

Regardless of company's sector or size, diversified businesses achieve stronger financial results: BDC study

Highlights

• More than half of small and mid-sized enterprises (SMEs) in the resources sector depend heavily on just one client
• 70 percent of fully diversified SMEs have had strong revenue growth over the past three years, compared to only 20 percent of non-diversified businesses
• Age of business doesn't matter. Newer firms are just as diversified as older businesses.

MONTREAL, Nov. 30, 2015 /CNW Telbec/ - In today's economy, small and mid-sized enterprises (SMEs) that are well diversified have a far better chance of succeeding and prospering than undiversified businesses, concludes a new study by the Business Development Bank of Canada (BDC). BDC's study was based on a survey of 998 Alberta companies with five to 499 employees. 

"The message is clear—diversification is a critical strategy for Canadian businesses to succeed in these challenging times," says Pierre Cléroux, Chief Economist and Vice-President, Research at BDC. "Business owners who fail to do so may be missing growth opportunities and putting their company under unnecessary risk."

"We found a clear relationship between financial performance and the level of diversification," Cléroux says. In fact, nearly seven in 10 fully diversified companies had strong revenue growth—versus less than two in 10 undiversified businesses. Even businesses with a modest degree of diversification were more likely to have strong revenue growth than undiversified companies. When asked why companies hadn't diversified, their most common response was "no need" or "no interest."

Risks and opportunities vary by sector

• Manufacturing—Exporting is the most critical diversification strategy for manufacturing companies. More than one in four manufacturers that export had 20% annual profit growth or higher in the last three years—versus just 8% of those with no regular exports.
• Resources—Having clients in multiple cities is the strongest predictor of strong revenue and profit growth in the resources sector. Seven in 10 resources companies with clients in more than one city had 10% or higher annual revenue growth in the past three years—versus just three in 10 companies with clients in only one city.
• Construction—Construction businesses with multiple product or service lines report by far the strongest financial performance. Six in 10 such companies achieved 10% or higher annual revenue growth over the last three years—compared to only three in 10 companies that offer only one product or service line.

As part of the study, BDC also asked its business consultants to share advice on how entrepreneurs can develop a diversification strategy. Some of their tips:

• Harness core strengths—Companies should think about how existing assets (buildings, machinery, staff, expertise) can be used for other purposes.
• Ensure financial stability—When diversifying, companies shouldn't jeopardize existing operations, but instead consider the least costly and complicated options. New markets can come from relatively small changes to existing products or services.
• Address weaknesses—Entrepreneurs should constantly stress-test their business. For example, they can ask what would happen if they lost their biggest client or faced an economic shock. Solutions could include adding a few more regular clients or adapting an existing product or service.

Earlier this month BDC earmarked $500-million in additional financing for Canadian SMEs impacted by the decline in oil prices. It also provided advisory solutions to help companies diversify and adjust their business operations.

For more detailed research results, download the full BDC study.

About BDC
BDC is the only bank dedicated exclusively to entrepreneurs. With more than 100 business centres and over 32,000 clients across Canada, it offers loans, investments and advisory services. BDC's purpose is to support Canadian entrepreneurship with a focus on small and medium-sized businesses. To learn more, visit www.bdc.ca.

SOURCE Business Development Bank of Canada

Solange Nicholson, AJC Media Group, 403-801-3259