Learn more about how to tell if a business is viable.
What Is Business Viability?
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. The business would need to increase revenue, cut costs, or both. Viability is closely linked to profit as well as solvency and liquidity.
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: 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.
Viability vs. Solvency
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
Liquidity is more of a short-term measure. It refers to the ability of a business to quickly turn assets into cash without loss. If your business needs money, you may have to sell assets. Unless the asset is cash, the most liquid asset of all, you may lose money by selling. For example, you may not get full value if you sell receivables. If you try to sell equipment, you will probably take a loss because the equipment has most likely depreciated. If you’re liquid, you have enough cash or other easily liquidated assets to ensure you can pay your immediate bills and/or your employees. This is called positive cash flow, and positive cash flow means liquidity.
