How to tell if your business is sustainable

The unstable economy and new leadership could mean a change to government policies, and for many businesses this could mean the difference between continuing to operate and becoming unviable, accounting firm RSM Bird Cameron has claimed.

The company said a possible change in policies means now is the time for business owners to assess their company’s ongoing viability, find opportunities to reduce costs and review their future funding model.

“When changes are likely to unsettle the economic landscape, that assessment is more important than ever. And, if the business is likely to become unviable in the near future, then owners must make that call as soon as possible to minimise the negative repercussions of winding up the business,” said Andrew Beck, turnaround and insolvency partner at RSM Bird Cameron.

"There are four factors that indicate a business is sustainable. If these factors are out of balance, then the business should take steps to turn them around.”

1. Cash flow

Cash flow refers to the amount of money available to a business for paying suppliers and employees, and investing in growth. If cash flow dries up, a business is unlikely to be able to operate since it cannot access needed resources.

“Businesses can improve their cash flow by encouraging customers to pay promptly, arranging to pay suppliers slowly and finding ways to cut costs throughout the business,” said Beck.

2. Working capital

Working capital is a company’s assets minus its liabilities, also known as leverage. The more assets a company has in relation to its liabilities, the more viable it is.

“Companies with a strong working capital position are able to remain viable because they have the resources they need to continue operating, even in the lean times. They can improve their position by liquidating assets for cash, exchanging short-term debt for long-term debt, issuing stock for cash and improving their accounts receivable processes,” he said.

3. Financiers onside

When financiers are onside, companies are better positioned to borrow funds to continue operating. In a tight economic climate, financiers keep a close eye on debtors.

“An early sign that a company may not be sustainable is that its financiers lose confidence in the organisation. Keep financiers onside by meeting obligations promptly and getting in touch immediately if you need time to pay. Keeping your debt-to-asset ratio in check also gives financiers confidence in your ability to pay.”

4. Employees onside

For an organisation to remain sustainable in the long term it needs employees that are engaged, committed and reliable. Employees are usually the first to sense if a company is likely to become unviable. At the same time, employees that aren’t committed to the organisation can cause its downfall by offering substandard work.

“Keeping valuable employees onside and removing those that risk your operations is vital for ongoing sustainability. If your employees are leaving in droves, take a look at your operations and management to see where you can improve,” said Beck.

“Any company that is concerned about its viability should take immediate action. Most situations can be remedied if they are addressed in a timely fashion; it’s what you don’t know that could cause the biggest problems.”