Importance of financial viability in an organization

This essay sample will talk about what is financial viability, how it works in a business or organization and how it is important for a business to maintain high business revenue. Before jump directly on why financial viability is important for a company, let’s first discuss the term financial viability and an example of the right financial viable decision.

What is financial viability with an example of the right financial viable decision?

Financial or business viability is defined as the ability of an organization to generate sufficient income to link up with operating payments, debt commitments and to allow business growth while maintaining the levels of the services and goods. To achieve the optional goals and sustainability of the profits for a long period of time, financial decisions must be viable.

Being financially viable means that a company has the ability to generate revenue. Revenue is the income a business has generated by selling their goods and services without any deductions. Revenue enables an organization to spent money in order to make sales, maintain their assets as well as providing further growth and advancement and for the organization in the future.

Financial viability of an organization can find out by reviewing the current performance and assessing or comparing it with the past performances of the company. Thus, making a financially viable decision is very crucial for the organization which directly affects whether the business is going to be successful or not. Making sure about viable decision financially is to ensure profitability.

Let’s understand with a good example of a financially viable decision. Let’s say if a company purchased an iPhone at expensive prices to use it as a video recording device. Eventually, if it performed better in a long term and helped a company increasing the revenue, then it will be considered as an asset apart from its costly expenses. So, investing in an iPhone sets an example of a financially viable decision.

Thus, before stepping into a business or establishing any startup, every individual should acquire a certain level of financial knowledge.

Now, let’s dive into why it is important for a business to be financially viable.

Importance of financial viability to run an organization successfully

As you now get an overview of financial viability and the decisions a company makes in accordance with it. So, now, let’s understand the importance of financial viability to run an organization successfully and helping it to grow faster. It includes some factors and roles of an organization that have major importance in maintaining financial viability such as

Maintaining operations within an organization

Operations, practices and processes performed in an organization have to be managed and maintained over a period of time. The team assigned for operation management in the company have the power to administer business practices that can create the highest level of efficiency possible within the organization.

Maintenance of operations is closely concerned with the management of the goods and services efficiently to maximize the profit of an organization. Utilizing and providing adequate resources such as staff, equipment, plant and machinery, working capital and other facilities are taken into account of operations management. Maintaining operations and resources is considered for an attempt to balance the costs with revenue in order to achieve net operating profit at the highest level.

Determining Solvency of an organization

A solvency ratio is calculated to determine whether a company can stand financially in the future or not. It is a performance metric that helps in examining the company’s financial health and to evaluate whether a company can meet their financial obligations in the long term or not.

Thus, financial viability is directly related to the solvency of the organization. The formula to calculate the solvency ratio is represented by dividing a company’s after-tax net income plus depreciation by the sum of its liabilities. High solvency ratio denotes that a company can remain stable financially in the future.

Determining Profitability of the services of an organization

The factors that influence the profitability of the business and firms can help in determining it.

1. Checking net profit margin and evaluating the net profit is a key to determine the company’s profitability
2. Calculating gross profit is an important factor that can influence the level of profitability in the organization.
3. Analyzing operational expenses is another factor to determine profitability
4. Calculating profit per client is very significant in assessing profitability
5. Determining the degree of competition also plays a big role in the profit of the products and services.

Balancing the Cash flows and investments

The cash flow stability is one of the most important factors that make a business viable for its enough number of assets. The day to day operations have to be evaluated keeping in mind the cash flows. Cash flows indicate the inflow and the outflow of money in the business. It enables to handle debts, reinvestment in the business, pay expenses and provides an understanding of the future challenges.

Stabilizing customer base

To create a viable business, your customer base needs to be stable. You should know who is going to buy your products and services. In creating a good customer base, an organization should be in a position to research well in order to seek who those people are who wants your services.

Purpose of Evaluating Financial viability of an organization

The purpose of evaluating the financial viability is to determine whether a company model is viable or not and secondly, to detect the risks that can be easily targeted in the process of product discovery. Thus, to analyze and evaluate the financial viability is the study of key components in a business model such as

• Market Size
• Conversion
• Retention
• Acquisition
• Costs and Price
• Revenue Model

If the result of the evaluation is negative, then the organization should not go for further considerations. However, if the result of the evaluation is positive, then a business can start development but must not commit all resources, people and budget. Business enhancement should be in the steady incremental approach of lean product development.

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