Business Viability: What Is It?
A company is considered to be viable if it is operating well or has the capacity to do so. Profitability is the state in which a business generates more money than it expends on operating expenses.
A business is hard to turn around if it isn’t profitable. The company would have to boost sales, reduce expenses, or do both. Profit, solvency, and liquidity are all directly related to viability.
How Business Viability Works
Creating a viable business is a two-part process. First, it means creating a marketing strategy by knowing who you are, who you are selling to, and who else is selling to them. Second, it means having your financial house in order.
To create a marketing strategy that will make your business viable, you’ll need to have this information:
- Unique selling proposition: This is a critical factor in having a viable business. Being unique keeps your business out in front of the competition.
- Stable customer base: To be viable, you have to know who is going to buy your product or service. That means researching to find out who these people are.
- Competitive advantage: Even if your product is unique and you know who you’re selling to, you must always consider the competition. Find out who your competitors are and keep them in mind as you create your marketing strategy.
In addition to your marketing strategy, a continuing focus on your business’ financial status will help create a viable business. This includes:
- Cash stability: The most important factor that makes a business viable is that it has enough assets (cash and other reserve funds) for day-to-day operations and to weather the ups and downs that all businesses experience. Getting to cash stability doesn’t happen overnight. It means being frugal, not over-spending in anticipation of sales, and not taking too much out of the business.
- Continuing attention to your financial status: Having a viable business means always knowing where your business is financially. Get good financial software, input all your business information regularly, and analyze it against your goals for cash stability and other factors.
Note
Use business check-up ratios to measure the health of your business.
Viability vs. Solvency
Viability
- A general assessment of whether a business is (or will be) successful
- Involves multiple aspects of a business, including marketing and financials
Solvency
- An assessment of whether a business has enough money
- Often measured using a current ratio
Business viability is often confused with two other terms that are often used for business performance—solvency and liquidity. A business is solvent when it has enough assets to cover its liabilities. Solvency is often confused with liquidity, but it’s not the same thing.
Solvency is often measured as a current ratio, which is a business’s total current assets divided by its total current liabilities. A business should have a current ratio of 2:1 to be solvent and cover liabilities, which means that it has twice as many current assets as it has current liabilities. You need twice as many assets as liabilities because selling assets to raise cash may result in losses. A business is solvent and not likely to declare bankruptcy if its current ratio is over 2:1.
Viability vs. Liquidity
Viability
- An assessment of the overall business model, not just finances
- Looks at both short- and long-term profitability
Liquidity
- Short-term measure of financial health
- Looks at the ability of a business to quickly turn assets into cash
More of a short-term metric is liquidity. It speaks to a company’s capacity to swiftly and profitably convert assets into cash. You may need to sell assets if your company needs money. Selling an asset could result in a loss of funds unless it’s cash, which is the most liquid asset. For instance, if you sell receivables, you could not receive the full amount. Equipment has undoubtedly depreciated, so if you try to sell it, you will probably lose money.
If you are liquid, you have sufficient cash on hand or other readily liquidable assets to cover your employees’ salaries as well as your urgent liabilities. Positive cash flow is what is meant by this, and it denotes liquidity.
Key Takeaways
- Business viability looks at a business’ long-term survival and profitability.
- Creating a viable business means having a good marketing strategy and keeping a close eye on your financials.
- Viability is different from solvency and liquidity.
- Solvency means having enough assets to cover your liabilities.
- Liquidity means having the ability to quickly turn assets into cash.
