Every business needs a solid plan for financial viability. This means having a clear understanding of your revenue streams, your costs, and your profitability. Without this information, it’s impossible to make sound decisions about where to allocate resources or how to grow your business.
What is financial viability?
**Financial viability is the ability of an organisation to generate enough revenue to cover its operating costs and generate a profit. It is a key indicator of the long-term health of a business and is often used as a metric by investors and lenders when considering whether to provide funding. **A company that is not financially viable may be at risk of defaulting on its debt obligations, which could lead to bankruptcy.
There are a few key components to consider when creating a financial viability plan:
- The company’s mission, vision and values: What is the purpose of your business? What do you hope to achieve? What are your core values? Your financial viability plan should be closely aligned with your company’s overall goals and objectives.
- The company’s current financial situation: This includes an analysis of your revenue streams, expenses, debts and assets. You’ll need to have a clear understanding of where your business stands financially before you can create a plan for improving its financial health.
- The market opportunity: Who is your target audience? What needs does your product or service address? How much potential exists for growth in your industry or niche?
- The competition: Who are your main competitors? What are their strengths and weaknesses? How can you differentiate your offering in the marketplace?
- Your business model: How does your business make money? What are the key revenue streams? What are the costs associated with running your business?
- Your financial goals: What are your short-term and long-term financial targets? How much capital do you need to achieve these goals? When do you hope to reach them?
- Your action plan: This is the roadmap for how you’ll achieve your financial goals. It should include specific strategies and tactics, as well as timelines and milestones for measuring progress.
Viability vs. Solvency
In business, there is a distinction between viability and solvency. Viability means that the company can generate enough revenue to cover its costs; however, it may not have enough cash on hand to pay all of its debts.
Solvency, on the other hand, means that the company has enough cash or liquid assets to pay off ALL of its debts if necessary. A viable company might be insolvent (unable to pay all debts), while an insolvent company is not viable (cannot generate sufficient revenue).
Why is Financial Viability Important In Your Business Plan?
Financial viability is an important aspect of a business plan and is often the make-or-break factor in whether or not a new business venture is successful. A business plan must include a detailed financial analysis that assesses the potential revenue and expenses of the new business and determines whether or not the venture is likely to be profitable. In addition to assessing the financial viability of the business, the financial analysis can also provide important insights into ways to reduce costs and increase revenues.
A good financial analysis will take into account all of the potential revenue sources for the business, as well as all of the possible expenses that could be incurred. It is important to remember that even a small change in either income or expenses can have a large impact on the overall profitability of the business. For this reason, it is essential to have a clear understanding of both your expected income and your expected expenses before creating a financial plan for your new business venture.
Some important aspects to consider are:
Outgoings
- The price of your product or service
- The costs of raw materials or other inputs
- The cost of staff
- The overhead costs of running the business (e.g., rent, utilities, insurance)
- Marketing and advertising expenses
- Taxes
Income
- Income Estimated sales of your product or service
- Number of clients/visitors expected
- Number of days/hours your business will operate Other forms of income, such as interest or dividends
These will form the backbone of your profit and loss estimations and therefore give you a good idea of the financial viability of your business.
Financial viability is one of the most important factors when in the planning stage of your business and therefore must be as comprehensive as possible before moving forward. Wether than be at start-up or growth of your business.
At Squareplan we work with you to make sure you have considered all areas of financial viability and will show you what the likely outcome will be in different scenarios. Get in touch with us today to start your business plan journey.