“Is it viable?” is the question behind almost every decision made about a business: whether to lend to it, invest in it, endorse it for a visa, sign a lease with it, or start it in the first place. It is also a question that is often answered by feel rather than by numbers.
A business is financially viable when it can cover its costs, make a reasonable profit, and pay its bills as they fall due, not just this month but for the foreseeable future. All three parts matter, and a business can pass one while failing the others.
Viability, profitability and solvency
These three words get used as if they mean the same thing. They do not.
Profitability is about the profit and loss account: over a period, does income exceed costs? A business can be profitable on paper and still run out of money, because profit counts sales when they are made and cash arrives when customers pay.
Solvency is about the balance sheet and the bank account: can the business pay its debts? There are two tests. Cash-flow solvency asks whether it can pay its bills as they fall due. Balance-sheet solvency asks whether its assets exceed its liabilities. A company that fails either test is insolvent, and its directors have legal duties to creditors once they know or ought to know that.
Viability looks forward and joins the two. A viable business is one that is expected to keep making a profit and keep paying its bills over time, without needing a steady stream of new money to stay afloat. A new business will usually lose money for a while, and can still be viable if the plan shows it reaching a sustainable position, funded all the way there.
How a business plan tests viability
Viability is not a judgement you can make from a single figure. It comes from a small set of numbers that a proper financial forecast produces.
The gross margin. What is left from each sale after the direct cost of making or delivering it. If the margin is too thin, no amount of volume will cover the overheads.
The break-even point. The level of sales, or the month, at which the business covers all its costs. If break-even needs more customers than the premises can serve or the market can supply, the business is not viable as planned.
The cash flow forecast’s lowest point. The smallest balance the bank account reaches over the forecast period. It tells you how much funding the business actually needs and when. There is more on this in what a lender checks in your cash flow forecast.
Sensitivity. What happens to all three if sales come in 20% lower, costs 10% higher, or customers pay a month later? A business that is only viable when everything goes to plan is fragile, and every reader of a business plan knows that plans rarely go to plan.
What goes into the forecast
To produce those numbers, the forecast needs the following, each based on evidence rather than hope:
Income
- How many customers, how often they buy, and at what price
- When they pay, not just when they buy
- Any other income, such as grants or interest
Costs
- The direct cost of each sale: materials, stock, packaging, sub-contracted labour
- Staff costs, including employer National Insurance and pension contributions
- Overheads: rent, rates, utilities, insurance, software, marketing, professional fees
- Finance costs: loan repayments and interest
- Tax: VAT if you are registered, and Corporation Tax or income tax on the profit
The most common gaps are the ones that do not feel like costs of the business: the owner’s own pay, employer’s costs on top of wages, and tax. Leave those out and a business can look viable when it is not.
Why it matters beyond the funding application
Viability is usually tested because someone else asks: a lender, an investor, an endorsing body. But the person who benefits most from the test is the owner. Finding out that the business needs twice the funding you expected, or does not break even at the price you planned to charge, is valuable before you sign a lease and very expensive afterwards.
Once the business is trading, the same test keeps working. Comparing actual results with the forecast every month shows whether the business is still on a viable path while there is time to act. See how often you should update your business plan.
Testing your own business
SquarePlan’s software asks about your sales, costs and funding and builds the gross margin, break-even point, monthly cash flow and scenarios for you, with VAT, Corporation Tax and National Insurance worked out along the way. If you would rather have a chartered accountant build and test the numbers with you, our business plan writing service starts at £499.