Researchers at Cranfield School of Management claim to have revealed the link between risk taking and the financial performance of their business, finding that risk-takers are likely to achieve the highest sales growth, but that over-confidence can also lead to poor profit performance by owner-managers.
The research, carried out among UK-based SMEs over three years by David Molian, co-director of CREDO, the School of Management’s Centre for Small Business Growth and Development, consisted of profiling the cognitive traits of 50 owner-managers who had participated in Cranfield’s Business Growth and Development programmes between 2002 and 2004. It examined “entrepreneurs’ propensity or aversion to taking risks, and their propensity to be either over or under-confident in their own judgement.”
Entrepreneurs were subsequently asked to report their companies’ financial performance for the previous five years, in terms of both turnover and profitability, and the data was compared with their cognitive traits.
David Molian observed that “Owner-managers who are more open to risk stand a much stronger chance of growing their sales. That may come as no surprise, but taking risk is no guarantee of growing profits. A crucial personality factor behind growing profitably seems to be confidence in your judgement, especially in areas outside specialist expertise.
Owner-managers who are excessively confident in their judgement are significantly less likely to grow profits. The reverse holds true: if you temper your judgement with caution, you are more likely to grow your profits, relative to other owner-managed businesses.”
The survey is continuing throughout the rest of this month, and CREDO is keen for more volunteers.
Owner-managers who would like to participate should contact David Molian by e-mail at [email protected]