Leading indicators of failure: a study of SMEs in the construction sector in Wales and Scotland

In a dynamic UK economy, small and medium sized enterprises (SMEs) play an important role by contributing to employment and growth. Despite recognition of the importance of SMEs, and the diagnostic value of developing models for the sector, very few research studies have investigated developing failure prediction models for these businesses. Further, previous research studies highlight the importance of developing models on a regional basis rather than on a cross-regional or cross national basis. This study contributes to research in the area of failure prediction modeling in two ways. Firstly, the study successfully develops failure prediction models for construction SMEs in two regions of the UK, Wales and Scotland. Financial ratios, representing 'leading indicators' of failure, were used to develop failure prediction models by applying a range of statistical techniques including factor analysis, discriminant analysis and logistic regression analysis. In addition, the application of logistic regression analysis identified differences in the 'leading indicators' of failure between the two regions. Secondly, the study reflects on the exogenous and endogenous factors that impact on SME performance and concludes that these factors partially explain or inform the leading indicators included in the models developed. Therefore, the study adds to the body of knowledge by suggesting possible causes of success and failure of construction SMEs in Scotland and Wales.