Why Is Financial Stability Important in Business?

Financial stability feeds on itself with more profits and security.

Businesses are established to make money. First, the business generates revenue to meet operating costs and maintain itself as a growing concern. Second, profits reward management and owners for the commercial risks involved. Financial stability and earnings power are directly linked.

Identification

Financial stability relates to the ability to pay overhead expenses, pare down debt and return capital to investors. Balance sheets, income statements and cash flow statements provide statistical measures of stability. Further, strong management and branding create goodwill that is an intangible component of value.

Benefits

Financial stability compounds to grow profits. Lenders, investors and employees are more willing to deal with financially stable businesses upon favorable terms. These favorable terms allow for expansion, more profits and greater stability.

Misconceptions

No calculation exists to describe perfect financial stability. Security varies according to industry, economic conditions and the stage in its life cycle from which the business operates. For example, growing technology companies carry less cash on the books than mature banks.

Considerations

The business should remain close to its core competency and strategy through expansion. Failure to do so leads to unnecessary risk taking.

Warnings

Financial stability can quickly deteriorate toward bankruptcy with mismanagement. Regularly monitor statements and decision making to ensure that the business stays the course.

References

• Investopedia: Financial Ratio Tutorial
• Investopedia: Financial Statements Introduction
• Investopedia: Reading the Balance Sheet

Resources

• SBA Loans and Requirements