What Is Business Viability?
Heather Saffer has finally found it — a viable business. At 32 years old, after years spent in multiple jobs and several previous failed business attempts, she hit it big with Dollop Gourmet Frosting and she got a Shark Tank investor to boot. It looks like she has finally found a viable business model. But what exactly does that mean?
What Is Viability of a Business?
The viability of a business is measured by its long-term survival and its ability to sustain profits over a period of time. A business is able to survive when it's viable because it continues to make a profit year after year. The longer a company can stay profitable, the better it's viability.
A business demonstrates its viability by making a profit every year of its existence. Some say a viable business is one "with legs," and the Cambridge Dictionary says something with legs can continue to exist and be successful for a long time.
Viability is like trust. When your trust in someone is shaken, it's almost impossible to get it back. And when a business loses its profitability, that's difficult to recover. So viability is linked to profit, but also to both solvency and liquidity.
How Do I Make Sure My Business is Viable?
Viability is tricky to define and create, but there are some key factors to making a business viable. Consider these factors in comparison to your business, and take steps to increase viability.
Creating viability 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 business financial house in order.
To create a marketing strategy that will make your business viable, you'll need to have this information:
1. Unique Selling Proposition. Having a unique selling proposition (usually called a USP) is a first critical factor in having a viable business. Heather Saffer found a unique spot on the shelf - gourmet, organic frosting. What makes your products or services unique? Being unique keeps your business out in front of the competition.
2. Stable Customer Base. Having a unique product or service is just the first step. To be viable, you have to know who is going to buy your product or service. That means doing research to find out who these people are. People who buy regular frosting are not the same people who buy Dollop frosting.
3. Competitive Advantage. Even if your product is unique, and you know who you are selling to, you must always consider the competition. Find out who might be your competitors, who might sell similar or new competitive products. Create a marketing strategy that keeps your competitive advantage.
in addition to your marketing strategy, a continuing focus on your business' financial status will help create that viable business.
4. Cash Stability. Probably the most important factor that makes a business viable is that it has assets (cash and other reserve funds) for day-to-day operations and also to weather those ups and downs that all businesses. Getting to cash stability isn't going to come overnight. It means being frugal, not over-spending in anticipation of sales, and not taking too much out of the business.
5. Continuing Attention to Your Financial Status. Most business owners get tripped up by their finances. They are too busy doing all the other things that need to be done. But having a viable business means always being able to know where your business is financially. Get good financial software, input all your business information regularly, and analyze it against goals for cash stability and other factors. Use these business check-up ratios to measure the health of your business.
How Is Viability Different From 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. This ratio recognizes that selling assets to raise cash may result in losses so more assets are necessary. 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'll lose money by selling. For example, you may not get full value if you sell receivables. And 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 assets in cash that you can pay your immediate bills or pay your employees. This is called a positive cash flow, and positive cash flow means liquidity.
The Long-term Look at Business Solvency, Liquidity, and Viability
Is your business solvent, liquid or viable? Creating a business that is solvent, liquid, and viable, is a continuing effort. But it's worth it, because you will be creating an tremendous asset and building a business for the long term.