Financial viability refers to an organisations ability to generate sufficient income to meet operating payments, debt commitments and, where applicable, to allow growth while maintaining service levels.
It is important to look at all aspects of the business to determine which areas of the business are profitable and those areas that are perhaps lacking or require improvement.
In the context of business, if a business is seen to be financial viable it means that it can work successfully. A viable business is one that we would expect to make a profit year after year. It refers to a business that can continue developing, growing, advancing or thriving.
To determine the financial viability of a business, one would need to examine elements such as the business cashflow, direct expenses, operating profit and net profit just to name a few.
If you were planning to open or expand a business, you would need to conduct some research to determine whether the idea will make money e.g. whether it will be profitable.
The main purpose of running any business is profit. Profit is in hand amount after paying all bills and expenses.
Operating Profit is the income left after paying all expenses and costs paid by the company in running the business.
Operating profit is gross profit minus operating expenses and can be written as:-
- Operating Profit = Gross Profit – Operating Expenses
Net Profit is the total of remaining income left after accounting of all cash flows. It can be inflow or outflow, which represent positive or negative. It is also the amount of earning left after reducing all expenses that are done by the company, interest paid by the company to the lender, and taxes. Net Profit is the profit generated from all sources after deducting all expenses.
It tells about the profitability of the company, and it shows the actual profit generated by the company in a particular accounting period. It is a basic difference between total revenue and the total cost incurred by the company in running the business.
The net profit is total revenue minus total cost which can be expressed as:-
- Net Profit = Total Revenue – Total Cost.
By looking at the profit margin by industry, you can see how your business compares to others in the same sector. This information can help you determine whether or not your business is in good shape.
As a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered good, and a 5% margin is low. But you should note that what is considered a good margin varies widely by industry.