By Daniel Hunter
More than half (51%) of small and medium-sized businesses (SMEs) surveyed admit to delaying the upkeep of an operational asset (e.g. machinery, vehicles, IT and property maintenance) at some point in the past two years, according to the latest SME Risk Index from global insurer, Zurich.
The research, which polled more than 500 decision-makers from British SMEs, found that 41% of respondents who said their business has delayed investment in operational assets in the last two years said they did so as a result of uncertainty due to the economic environment.
The recent poor economic conditions have subsequently encouraged a large number of SMEs (53%) to become more resourceful — which may have lead them to adopt a traditional ‘make do and mend’ approach. And almost one-fifth (18%) of respondents that have delayed investment stated they did so to stretch the life of their operational assets further and to get the most value from them - signalling a possible rise in ‘asset sweating’.
When asked which operational assets they had delayed investment in the upkeep or replacement of, SME respondents said IT hardware (30%) and software assets (24%) were put on hold. This is particularly surprising given the productivity gains, cost efficiencies and competitive advantage associated with many new technologies. Through increasing investment in technologies such as cloud services, SMEs could in fact be better off in the long term.
Delayed investment in motor/vehicle fleet and general premises/property were listed at 15% and 14% respectively. The risk here is that delayed maintenance may increase the actual costs to the business in the long-term. There are also potentially serious workforce safety and liability exposures which could result in fines and legal costs or potentially material implications relating to the business' insurance policy.
Furthermore, just over a third (34%) of those that delayed investment did so by over a year and 17% don’t plan to start, or resume, investing in operational assets until consistent growth returns to the economy.
Delaying investment in the short-term might seem like a sensible approach for many SMEs battling with the current economic challenges — but it can also be a ‘false economy’. An on-going, proportionate level of investment in the right operational assets can provide potentially more significant cost savings and competitive advantage over the longer-term — and this should not be overlooked.
Unsurprisingly there can be critical risks, such as unplanned downtime, machinery failure and, in some cases, increased fire exposure, associated with not investing in the upkeep of operational assets and premises. Over half (56%) of SME respondents whose businesses have delayed admit they are concerned about the possible risks associated with not investing in the upkeep or replacement of operational assets. 34% of those surveyed admit IT management (such as network failure) was the biggest operational risk to their business, presumably a direct result of the lack of investment in IT operations.
Additionally, 60% of respondents whose businesses have delayed the maintenance of operational assets say their business has not considering the potential insurance coverage implications of delayed asset investment, which could be leaving them greatly exposed in the event of needing to make a claim.
“It is great to see that small businesses are becoming more resourceful in the management of their operations during these challenging economic times. However, the research found that a number of British SMEs are trying to get the most value out of their existing assets by delaying investment - a concept known as ‘asset sweating’- which is concerning," Richard Coleman, Director of SME at Zurich Insurance said.
“Delaying critical investment and maintenance can make SMEs vulnerable to unexpected operational business risks and it’s therefore important that SMEs considering this approach think through their decision carefully.
"It is also critically important that firms seek professional advice and guidance about the potential implications for their insurance coverage. It’s imperative that SMEs strike a careful balance between getting the most out of existing assets on the one hand, and not hindering necessary maintenance, protection or the businesses long-term development on the other.”
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