Solvent, Liquid, Viable – what state is your business in?
Would you say it was profitable? Solvent? How about viable?
These similar sounding terms all mean technically different things and it can be hard to quantify exactly what criteria should be used to properly gauge success.
So what do we mean when we talk about business viability and why is it so important?
Business viability is the ability of a company to generate and sustain profits over a period of time and make long-term survival look assured.
Solvency means a business has enough assets to cover its liabilities. For instance, if it has more cash in the bank, disposable stock and other assets than the total it owes as debts then it’s considered solvent.
Events like the Covid-19 pandemic and lockdown could seriously impact the solvency of any usually well-run business but under normal circumstances experts usually agree that a 2:1 ratio of assets to liabilities will be proof that a business can be said to be solvent.
Liquidity is the most short-term indicator and gives the best current assessment of a businesses wherewithal.
It refers to the company’s ability to convert its assets into cash without incurring a loss while doing so. Any business with readily available cash or assets it could easily realise is considered to be liquid.
If the same business needed to sell vehicles or plant equipment then they would be considered less liquid as these assets would be realised for less than was paid for them because of depreciation. Similarly, selling stock or other assets quickly at a loss to raise cash would also be illiquid.
What else makes a business viable?
Viability doesn’t just come down to pure profit.
There are other tangible and intangible factors that taken together will better indicate how viable a business could be in future if not in the short term. These include:
- Unique Selling Points (USP) – Does the business have a unique selling point or market-leading one? Something that differentiates it or gives it an inherent competitive advantage? If it does then this could be an additional path to viability.
- Stable Customer Base – who’s buying the products? Will they continue to buy continually or will they move between suppliers? How loyal and dependable is this group? A reliable customer base will certainly make viability easier.
- Stability – financial stability is always a big plus – having cash, assets or other reserve funds means a business has more options it can use to expand or consolidate depending on the current trading conditions.
Stability can also be influenced by factors such as staff and management turnover, recruitment and retention, training and other indicators as to how appealing a company is to work for.
All of this might appear daunting if you haven’t looked at your business holistically before or for a long time but we can help you start from the ground up with a business viability review.
Our business viability reviews give you an unbiased, professional view on how your business intends to operate over the next 12 months and how profitable, realistic and viable it could be based on your plans and the available evidence.
Management sets out what their aims and objectives for the period are and equally importantly, how they are going to go about achieving them. They’ll demonstrate how they can run the business to meet these and overcome any other likely obstacles that might arise.
To further illustrate the projections, we’ll produce detailed cash flows and profit and loss forecasts that will bolster strengths and identify any weaknesses in the management’s targets.
The business viability review is not legally binding in any aspect but it provides one of the most accurate, evidence-based projections as to whether a business could be truly viable now and in the future.
We’ve conducted business viability reviews as stand-alone assessments and as part of a pre-pack administration process to help build a case for a business to be sold as part of restructuring process.
Given the uncertain nature of banks and lenders, proven evidence that a business could succeed given the right support could be critical in securing future funding for expansion or consolidation.
Contact us to arrange a business viability review of your company so that when the economy finally emerges from its enforced hibernation, your business will be primed and ready to take advantage of all the opportunities it can – knowing it really can be viable.