Importance of financial sustainability
The Oxford dictionary defines sustainability as the” ability to be maintained at a certain rate or level”. The Collins dictionary defines sustain as the “ability to continue or maintain something for some time”.
Without businesses, there will be little or no growth, fewer jobs, and less contribution to tax revenues. Vital goods and services would not be provided, and development wouldn’t take place. That said, business is not just about profits.
Harvard Business School stated that sustainability in business is the effect companies have on the economy, environment, and society. The aim is to make a positive contribution in at least one of these areas. It is important to consider the environmental, economic, and social factors during the decision-making process to ensure short-term profits do not turn into long-term liabilities.
Your contribution can be as simple as using renewable energy or sponsoring a child’s education or being involved with an NPO or participating in a community project.
Professor Rebecca Henderson notes that “you can not do business to do good in the world if you’re not doing well financially. Doing well and doing good are intertwined…” And this brings us to financial sustainability.
Financial sustainability can only be achieved within a sound, stable and healthy financial system.
Financial sustainability can therefore be defined as the capacity to obtain revenues in response to solving a problem, to sustain productive processes at a steady or growing rate, to produce results, and to obtain a surplus. (Adapted from the original definition by Patricia Leon)
The four fundamental pillars of financial sustainability are strategy and financial planning, a sound financial system, and addressing the risks involved.
We all want to generate as much revenue as possible in the shortest time possible. But it is of the utmost importance to know how much revenue we need to generate to cover the fixed cost and achieve success.
So, what happens when the expenses exceed the income? The first reaction is to increase the workload of the current employees, to save on additional employee costs. We can decide to take the loss and/ or try to identify additional revenue streams. This results in us being so busy with the day-to-day running of the business that we lose focus of the picture of success we have painted.
This is where a strategy comes to play. Strategy clarifies the mission and the objectives and prioritises the actions to achieve the objectives. The downfall is that the resources available or the capacity to generate additional resources are not being kept in mind. To overcome the resource challenge a financial plan must be developed. Thus, the purpose of the financial plan is to determine if enough resources are available to achieve the objectives. This plan is not set in stone and is based on different scenarios. A favourable plan ensures that all costs are covered and that the company is successful within a specific time frame.
As important as generating revenue is the management of the resources. The accounting procedures and controls are determined by the business’s needs. All transactions must be recorded to be able to get a complete picture of the financial standing of the business. Financial statements are the summary of the business’s financial activities. Periodic reviews are essential to ensure the finances align with the strategy.
We as business owners must be aware and be able to identify the risks involved in running the business. Anything that threatens the ability to achieve the financial objectives is a business risk.
Some of the risks you need to watch out for are:
| -Operational Risk | The risk is that the day-to-day operations of the business are not performed. |
| -Strategic Risk | Is the risk that if the business does not operate according to the business plan, over time the strategy will be less effective and the business will struggle to reach the objectives. |
| -External Risk | Is the risk that external influences will result in a non-achievement of the objectives. |
| -Compliance Risk | The risk is that the business will be non-compliant in terms of applicable laws and regulations. |
| -Liquidity Risk | Is the risk of incurring losses due to meeting payment obligations when they become due. |
| -Financial Risk | Is the possibility of losing money on the business investment. |
| -Financial Leverage | The risk of the interest expense payment is greater than the returns from the assets. |
| -Market Risk | The impact of the changes in the market on the business. |
| -Credit Risk | The risk is that the debtors will not pay the outstanding accounts, resulting in cash flow challenges. |
Four key components to achieve financial sustainability:
Long-Term Commitment
Starting a business is a long-term commitment. It is about making sacrifices to achieve the objectives in the long run.
Leadership and the team
Every ship needs a captain and an air plane needs a pilot. The example is set at the top and the leader/s must align the team to achieve the desired results.
Time and money
As the saying goes “time is money”. Every minute spent must be measured in monetary terms. The capital required to launch and the cost to operate the business must be determined.
Business Plan
A business plan is essential for any size business as it is way to evaluate if the effort is worth it or not. Some of the factors to consider are the potential market, the opportunities and threats in the environment, and the costs involved.
Financial sustainability is not a once-off project. It is an ongoing effort. By working to maintain financial stability as a business owner you will ensure that your business does well and you can then extend your success and do good to others.