What Is Business Viability?

Viability of a Business
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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 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. 

Is your business solvent, liquid or viable? Here's hoping it's all three!