What is Financial Viability and Why Does It Matter?
Alright, let’s talk about something that might sound super fancy but is actually pretty simple: financial viability. Basically, financial viability is all about whether your business can make enough money to keep going. It’s the difference between thriving and just surviving — or worse, closing up shop. So, how do you know if your business is financially viable? That’s where the “big three” financial reports come in.
The Big Three Financial Reports of Financial Viability
Understanding financial viability starts with knowing how to read the financial health of your business. And for that, you need to get cozy with these three key reports:
- Income Statement (a.k.a. Profit and Loss Statement)
- Balance Sheet
- Cash Flow Statement
1. Income Statement: Are You Profitable?
The income statement is like a report card for your business, showing your revenues and expenses over a specific period (usually monthly, quarterly, or yearly).
- What it tells you: Whether you’re making a profit or operating at a loss. It shows your total sales and subtracts all your expenses (like rent, salaries, and supplies) to give you your net income.
- Why it matters for financial viability: If you’re consistently bringing in more money than you’re spending, congrats — your business is financially viable! But if expenses are higher than revenues, it’s time to look closer at where you’re bleeding money.
- What to change: If your income statement shows a loss, you’ll want to cut down on unnecessary costs or look for ways to increase revenue. This could mean trimming down your marketing budget or launching a new product line.
2. Balance Sheet: What’s Your Business Worth?
Your balance sheet is all about your business’s assets (what you own), liabilities (what you owe), and equity (what’s left over after debts are paid). It’s a snapshot of your business’s value at a specific point in time.
- What it tells you: How financially strong your business is right now. Are your assets greater than your liabilities? That’s a good sign for your financial viability!
- Why it matters for financial viability: A healthy balance sheet means your business can weather storms, pay off debts, and possibly invest in future growth. If your liabilities outweigh your assets, it’s a red flag — you might be headed for trouble.
- What to change: If your liabilities are too high, focus on paying down debt or building up assets (like cash or equipment). You might also reconsider taking on new loans or reducing inventory if it’s tying up too much money.
3. Cash Flow Statement: Do You Have Enough Cash?
Even profitable businesses can fail if they run out of cash. The cash flow statement tracks how money moves in and out of your business. It breaks down your operating, investing, and financing activities.
- What it tells you: Whether you have enough cash on hand to cover daily expenses like paying suppliers, employees, and rent.
- Why it matters for financial viability: Positive cash flow means your business is generating enough money to keep the lights on. Negative cash flow, on the other hand, could lead to big problems, even if your income statement looks solid.
- What to change: If you’re running low on cash, you might need to speed up how quickly you collect payments from customers or delay some big expenses. Alternatively, consider negotiating longer payment terms with your suppliers to stretch out your cash flow.
Financial Viability in a Nutshell
In the simplest terms, financial viability is about making sure your business can pay the bills and keep growing. The big three financial reports — income statement, balance sheet, and cash flow statement — are your go-to tools to measure this. They tell you whether you’re profitable, how much your business is worth, and if you’ve got enough cash to keep running.
But here’s the kicker: these reports only matter if you do something with the information. If your profit’s in the red, expenses are sky-high, or your cash flow’s drying up, it’s time to act. That might mean cutting back on costs, paying off debt, or finding new ways to bring in cash.
Financial viability isn’t a one-time check-up. It’s an ongoing process of tracking, adjusting, and making sure your business stays on a solid footing. Keep an eye on those financial reports, make smart decisions, and you’ll be well on your way to keeping your business not just surviving, but thriving!
For any business owner or startup founder, understanding financial viability is more than just a nice-to-have — it’s critical to your success. That’s where a CFO comes in. By analyzing your income statement, balance sheet, and cash flow statement, a CFO can provide the clarity and direction you need to ensure your business is on solid ground. With their expertise, you’ll have the tools to increase profitability, manage debt, and optimize cash flow. Bringing a CFO on board ensures you’re not just reacting to financial issues, but proactively positioning your business for long-term growth and stability. Financial viability is key, and with a CFO by your side, you’ll have a trusted partner to help you navigate every step of the way. Ready to make sure your business thrives, not just survives?
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