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.
If you're interested in the topic of financial viability, be sure to watch our webinar on demand: Importance of financial viability and managing it through the use of technology.