Importance of financial sustainability
First, we need to consider the meaning of the word 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 will not be provided, and development won’t take place. With that, we must accept that 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 the 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 – apart from the frustrations with Eskom or sponsoring a child’s education or even being involved with an NGO or participating in a community project.
Professor Rebecca Henderson notes that “you cannot 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 by 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 fundamental pillars of financial sustainability are therefore Strategy and Financial Planning, a
sound financial system, and 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 thing 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 prioritizes 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. The least favourable plan ensures that all costs are covered and 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.
Financial sustainability cannot be achieved without the following component:
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 aeroplane 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 an evaluation 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, costs involved.
Financial Sustainability is not a once-off project. It is an ongoing effort. Being financially sustainable will enable business owners to be doing well and doing good.