When advising clients on potential investments and where to look for further opportunities diversification should be top of that checklist, according to a new research.
A new report produced by Business Development Bank of Canada (BDC), found that diversification correlates strongly with financial success. This is based on a survey of 998 Alberta businesses.
Whether in terms of products and services, geography, or number of customers, diversification was found to be significant in making small to medium sized businesses more financially successful. It also meant they were more likely to outperform those companies who had failed to diversify.
“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 of research at BDC. “Business owners who fail to do so may be missing growth opportunities and putting their company under unnecessary risk.”
This is important information for investors and advisors who may want to consider the ‘unnecessary risk’ those businesses might yield on their investments if they aren’t looking to diversify in any way.
When the companies who hadn’t diversified were asked why they hadn’t, the most common response was that there was “no need” or “no interest.” The research shows that there could in fact be a need if they want to have further financial success and gain more investment.
BDC, the bank dedicated exclusively to entrepreneurs, found that 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.
Earlier this month BDC was able to gain $500m for financing Canadian SMEs impacted by the decline in oil prices.