There are many factors that contribute to a company’s financial health, and there are many risks a finance team must contend with to ensure the business’s long-term survival. One of the key measures of risk is financial viability. But what exactly is it?
In this article, we define financial viability and explain why it’s so important for finance teams. We also discuss how to calculate the financial viability of a project and provide some best practices for maintaining financial viability.
What is financial viability?
Financial viability refers to a company's ability to generate the required cash flow to fulfil ongoing operational costs and debt repayments. It is also its ability to continue growing at the desired rate while still meeting customer expectations through high performance.
It can be a measure of a company’s ability to meet long-term financial targets, constantly maintaining a cushion that facilitates necessary investments at regular intervals. Financial viability must take into account many factors to be as helpful as possible, such as income, cash flow, net worth, bottom line, profitability, forecasted performance, and considerations beyond the finance team.
A financially viable project should produce enough cash to justify the initial investment, with a significant return on investment too.
Why is financial viability important?
It facilitates sustainable growth
To ensure your business succeeds you need excellent financial management, from the beginning all the way through to periods of growth. You are in a better position to seek funding for expansion plans when your finances are in order. And financial viability is one of key gauges of this order.
Better understanding of customers
A viable business is supported by a formidable customer base. If you are looking to sell to the right people, you must collate intricate details about prospects. Creating a solid customer base requires detailed research, so that you can figure out who is suitable for your offering. By determining this suitability, and by analysing each customer’s reliability (from a payment perspective), it becomes much easier to measure viability.
Improved cash flow
A healthy flow of cash is crucial to keep businesses afloat. By assessing all operations as things stand, it becomes much clearer as to how much fluid cash is flowing through the company. Visibility of cash flow makes it easier to take actions that will improve this aspect, which subsequently has a positive impact on financial viability too. This improvement also helps with handling debts, investing sensibly, paying expenses, and forecasting future performance.
Improved product profitability
Financial viability isn’t just something that can be applied to customers and projects, it can be applied to the products and services you offer too. By carrying out an assessment you can determine how profitable each offering is, and then determine whether it should be kept, changed, or removed completely. A product that isn’t profitable will eventually harm overall financial health.
Ensures activities don’t halt
If a business isn’t financially viable, it could lead to operations being halted, as they may be unable to pay bills or staff salaries. By analysing how sustainable the company is financially, it’s easier to determine whether operations can be maintained. Operations management, employees, equipment, machinery, and other resources must have the necessary budget assigned to them to ensure ongoing activity.
By being viable and sustainable, you are likely using existing resources in an optimal way, while also being better positioned for increased investment in systems and training.
How do you determine the financial viability of a project?
It is common for companies to carry out a financial viability analysis to figure out whether a potential project is a good use of money. If the project's economic returns exceed that of its expected costs, this is usually how it is deemed as viable. It can be a big risk to proceed with a project without doing this.
A product's viability refers to the proposed value of the product to the business in the long run, and how successful the product is likely to be within the realm of the target market. Questions should be asked such as how much demand is likely to be generated, and how much will it cost to create the product and take it to market?
Market viability, on the other hand, refers specifically to the market itself, which is usually most applicable when starting a business. You will need to figure out which market you are heading into, and how lucrative this market is likely to be.
It’s smart to analyse the market regularly, even if your company is established. Markets change quickly and often, so you need to figure out where you sit within this evolving environment. Aspects like the health and size of the market should be assessed, as well as the impact competitors are having on your profitability.
Financial viability best practices
Prioritise cash flow
As we’ve touched upon, finance teams must practice effective cash flow management if they want to keep their business financially viable. An annual cash flow statement lists all the specific items related to income and expenditure throughout the year. Using this will help with planning ahead and making sure you can cover essential outgoings.
Ensure constant lines of credit
Ensuring that there are multiple (and recurring) lines of credit is the best way to maintain healthy cash flow and functioning operations. This credit can be gained by borrowing money from banks and other lenders if necessary, or sourcing investment from shareholders and other contributors. Some businesses will be eligible for certain government grants which can serve as a useful source of income too.
Be sure to look at your current debts to see if they can be dealt with sooner, or if they can be combined into a more manageable debt. By refinancing your debt, it may be possible to find a better deal on the rates you are paying. Simply ignoring debts could see them snowball out of control and ultimately lead to a lack of financial viability.
It’s important to take stock of what the company currently owns. By assessing how much worth is tied up in fixed assets, actions can be taken to turn this into more fluid value if needed. Figuring out the rate of depreciation among assets is a good way to determine the optimal time to replace or sell them.
By periodically analysing the entire list of costs being faced, it becomes possible to determine if there is any unnecessary expenditure, which can then be rooted out to boost financial health. Or perhaps it may become apparent that the company is getting a bad deal for aspects like materials or energy rates, and subsequently better deals can be found.
Effective credit management
On top of proactively opening many lines of credit, it is important to adequately manage the money owed to the business by customers. Be sure to chase outstanding payments (and send reminders) in good time. There should be a sales policy in place so that customers are aware of the terms of their purchase (and any action you can take in the event of late payment). Invoices should be sent as quickly as possible to speed up the process.
Use financial management technology
Processes become more streamlined, and all the above practices are made easier, when adopting the assistance of financial management software. Tasks can be completed quicker, thus reducing costs and boosting efficiency. Technology allows businesses to have greater control over finance-related activity, providing better visibility and detailed insights that can be used to improve financial viability.
Using technology to achieve financial viability
At Advanced, we offer a Cloud-based accounting solution called Advanced Financials. With dedicated functionality for accounts payable/receivable, bank reconciliation, general ledger, expense management, asset management, purchase management, sales invoicing, and much more, it ensures all finance-related activity is fulfilled in a single digital location. Therefore, finance teams have one version of the truth when it comes to income and expenditure.
Being Cloud-based ensures the financial data held within this accounting software can be updated as soon as something changes. This information then fuels the built-in reports/dashboards so that accurate forecasts can be made to highlight future financial viability. Processes such as credit management can be automated, with instantaneous sales invoices which shorten the cycle of debt collection. This also provides the finance team with more time to focus on complex tasks.
Are you looking to make your business more financially viable with the help of technology? If so, be sure to read more about our Cloud-based accounting software.
Financial viability and sustainability are crucial aspects and support all other strategic key areas and activities. This is the ability to generate adequate income to meet operating payments and debt commitments, allow growth while maintaining high quality levels of service.What is the importance of viability? ›
Viability of the final product is an important measurement that impacts safety and efficacy of stem cell products and indicates the robustness of the manufacturing process. Drastically reduced viability of individual lots can be an important warning regarding manufacturing conditions or presence of toxic impurities.What is financial viability? ›
FINANCIAL VIABILITY: The system establishes and maintains an effective balance between long-term debt, asset values, operations and maintenance expenditures, and operating revenues.How do you evaluate the financial viability of a business explain? ›
- general economic factors;
- the tightness of the labour market;
- levels of demand for the required service;
- understanding of profit margins in the relevant industry;
- maturity of the relevant industry; and.
- the capacity of businesses to supply.
- Keep Personal And Company Finances Separate.
- Keep Yourself Marketable.
- Pay Yourself What You're Worth.
- Know Your Personal Financial Goals.
- Talk To Professionals.
- Review your current and future capital needs and determine how you will address your anticipated growth.
- Analyze and work to balance your profitability.
- Assess and improve your reporting and planning capabilities.
- Evaluate and understand the purchasing processes of your customers and key prospects.
Financial viability support basically represents the cash support from the government, which suggests the potential growth of PPP programs. In fact, this Financial viability support ensures to bridge the gap between project revenue and life-cycle costs, only after offering decent returns to the private investors.What is the viability of a business and its impact on the community? ›
BUSINESS VIABILITY AND ITS IMPACT ON THE COMMUNITY: • Business viability means that a business is (or has the potential to be) successful. A viable business is profitable, which means it has more revenue coming in than its spending on the costs of running the business.What is financial viability of a project? ›
A project is economically viable if the economic benefits of the project exceed its economic costs, when analyzed for society as a whole. The economic costs of the project are not the same as its financial costs—externalities and environmental impacts should be considered.What is financial viability simple? ›
Viability is a commercial judgement of the ability of a business to meet ongoing financial obligations, with an additional margin of comfort to support future investment and trading.
Conducting economic viability assessments can help to confirm a rationale for public investment, to fulfil regulatory requirements, or to demonstrate to project stakeholders that the project will provide an overall economic benefit to a region.What is the viability means? ›
: the quality or state of being viable : the ability to live, grow, and develop.What affects the viability of the business? ›
You can determine viability based on financial and non-financial factors. You look at numbers about profitability, assets, liquidity, cash flow, and private income. With these numbers, you can make ratios or calculation modules.How can a business improve viability? ›
- Get compliance right. While most business owners understand why it's important to run a professional business, many underestimate how critical it is to ensuring their business survives the unexpected. ...
- Focus on marketing. ...
- Invest in IT. ...
- Improve customer service. ...
- Prioritise profit.
Viability assessment is a process of assessing whether a site is financially viable, by looking at whether the value generated by a development is more than the cost of developing it. This includes looking at the key elements of gross development value, costs, land value, landowner premium, and developer return.Why is it important to be financially stable? ›
Financial stability is paramount for economic growth, as most transactions in the real economy are made through the financial system. The true value of financial stability is best illustrated in its absence, in periods of financial instability.What is the purpose of a viability assessment? ›
A viability assessment considers the likelihood of carers being able to meet the physical and emotional needs of the children now and throughout their childhoods; whether they will be provided with stability and boundaries and whether they will be safe. Police and medical checks are initiated.Which of the following is the most important factor that makes a business viable? ›
Perseverance. This is possibly the most important of success factors. Every new start-up business that I have ever come across finds it hard at first, and after that it gets even harder.How do you know if a business opportunity is viable? ›
- Listen to your potential clients and past leads. When you're targeting potential customers listen to their needs, wants, challenges and frustrations with your industry. ...
- Listen to your customers. ...
- Look at your competitors. ...
- Look at industry trends and insights.
A strong brand name and logo/image helps to keep your company firmly in the mind of your potential customers. If a customer's happy with your products or services, a solid identity helps to build customer loyalty across your business. People like to be associated with “good” brands.
The noun viability means the quality of being able to happen or having a reasonable chance of success. The viability of holding your party at a restaurant might depend on how many guests they can seat.What is viability in business? ›
Business viability refers to a situation in which a business is surviving. This survival is linked to financial position and performance. A business is viable where either: it is returning a profit that is sufficient to provide a return to the business owner while also meeting its commitments to business creditors.How do you use viability in a sentence? ›
- Neither is viable without the other and both require careful management to ensure that their viability is perpetuated. ...
- The influence of female presence on egg viability was, however, insignificant since ovipositing females had been subjected to a single complete uninterrupted mating.
Business viability means that a business is (or has the potential to be) successful. A viable business is profitable, which means it has more revenue coming in than it's spending on the costs of running the business. If a business isn't viable, it's difficult to recover.Why do you need to monitor the financial viability of the Organisation? ›
This will help you assess how your business is performing by comparing it to other businesses in your industry. You can use this information to improve the financial performance of your business. Business and industry associations often collect financial data and make it available online.What is the importance of financial? ›
Finance is the field of dealing with money matters. It is an important aspect for any individual or for an organization. In a business, it is a critical function because any business needs to make money to continue functioning. That is why it is considered to be a specialised field which requires trained people.What is economic viability of a business? ›
Appraising project economic viability
A project is economically viable if the economic benefits of the project exceed its economic costs, when analyzed for society as a whole. The economic costs of the project are not the same as its financial costs—externalities and environmental impacts should be considered.
You can determine viability based on financial and non-financial factors. You look at numbers about profitability, assets, liquidity, cash flow, and private income. With these numbers, you can make ratios or calculation modules.