Determine the viability of your business
- KVK Redactie
- 12 Nov 2020
- Edited 21 Jun 2023
- 6 min
- Managing and growing
If your business is struggling, you will hear the words 'viable business' quite often. What do these words mean and how do you find out if your business can survive?
Insight into your business viability gives you, your suppliers, and your financiers an indication of the health of your company. If you know more about factors that determine health, you can make better decisions about the next steps. For example, consider reducing your costs, adjusting your revenue model, seeking financing or, in the worst case, ending your business. A financier’s judgment on whether to provide financing depends on the factors that determine viability. For example, profitability. If you have insight yourself and take the judgment of a financier into account, you will be a better sparring partner for that financier, and for other financial advisors such as a bookkeeper or accountant.
Use tools to gain financial insights
Many useful tools can give you more financial insight and show you how your business is performing. For example:
- The Toekomstcheck gives you insight into your company's liquidity. With the check, you can see where you stand financially and what the outlook is for the next 12 months. It also shows how your company is prepared for various future scenarios.
- The MKB Diagnosetool (SME Diagnostic Tool, in Dutch) gives you insight into the financial health of your business, your profitability, your online visibility, and how you are performing in your sector. You can find out the value of your business and receive an advisory report. This includes the results and tips for your next step.
Video: Determine the viability of your business
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You can determine viability based on financial and non-financial factors. You look at numbers about profitability, assets, liquidity, cash flow, and private income. With these numbers, you can make ratios or calculation modules. You get these numbers from your profit and loss account and balance sheet, which together form the annual accounts. Non-financial factors concern the entrepreneur(s), the company, and environmental factors.
Cost-effectiveness is a way to measure the profitability of your company. You compare the profit with the average total invested capital (equity + loan capital). You calculate the average capital by adding the capital on January 1 to the capital on December 31 and dividing this by 2.
In a sole proprietorship, general partnership (vof), or public partnership, part of the profit goes towards an entrepreneur's allowance for the work delivered by the entrepreneur(s). For the calculation, the guide amount is €30,000.
(net profit + interest paid - entrepreneur's allowance) / (average total invested capital) x 100% = cost-effectiveness.
- Calculation of profatability of a sole proprietorship:
((40,000 + 2500 - 30,000) / 50,000) x 100% = 25%
In a private limited company (bv), the work of the entrepreneur(s) is already rewarded via salary or management fee.
- Calculation of profitability at a bv:
((net profit + interest paid + tax on profit) / total assets) x 100% = cost-effectiveness
Calculation example: ((50,000 + 25,000 + 45,000) / 500,000) x 100% = 24%
A return on total assets of between 5 and 10% is acceptable to financiers. Higher numbers in the calculation examples mean that the companies have above-average profitability.
Table: Sample balance sheet
|Fixed assets (1 year)||Equity|
|Current assets (< 1 year)||Long-term loan capital|
|Debtors||10,000||Short-term loan capital|
|Current account credit (overdraft)||25,000|
|Total Assets||170,000||Total Liabilities||170,000|
The relation between equity and total assets is called solvency. This is an indication of whether your company can meet its payment obligations in the long term. Financiers believe that a solvency percentage should be between 25 and 40. The standard for solvency differs per sector, per type of company, and per financier. Learn more about solvency.
Calculation of solvency
(equity / total assets) x 100% = solvency
Calculation example (with numbers from the sample balance sheet): (55,000 / 170,000) x 100% = 32%
Liquidity indicates whether you can pay your bills in the short term. You assess the liquidity of your company through your current ratio, quick ratio, and net working capital. The numbers in the calculations come from the sample balance sheet.
This ratio number indicates whether you can pay your (short-term) debts from your current assets. The value must be at least 1. For healthy companies, it is between 1.2 and 1.5.
Calculating current ratio
current assets + liquid assets / short-term debt = current ratio
Specified: (inventory + debtors + cash) / (overdraft + creditors) = current ratio
Calculation example: (25,000 + 10,000 + 10,000) / (25,000 + 10,000) = 1.29
Calculate quick ratio
The quick ratio number also indicates whether you can pay your (short-term) debts from your current assets. The difference from the current ratio is that you do not include the value of the inventory in this calculation. A positive value for this prefix is at least 1.
Specified: (debtors + cash) / (overdraft + creditors) = quick ratio
Calculation example: (10,000 + 10,000) / (25,000 + 10,000) = 0.57
Net working capital
Net working capital is the difference between current assets and short-term loan capital on a company's balance sheet. Net working capital is positive if current assets are greater than short-term loan capital. With this money, you can pay bills. It is money to use on a daily basis in your company and is therefore called working capital.
Calculating net working capital
current assets + cash - short-term debt = net working capital
Specified: (inventory + accounts receivable + cash) - (overdraft + accounts payable) = net working capital
Calculation example: (25,000 + 10,000 + 10,000) - (25,000 + 10,000) = 10,000
The cash flow is the difference between income and expenses during a period. This is an indication of the cash-generating capacity of your company. Are your expenses greater than your receipts? Then your cash flow is negative. You will then need additional financing. Are revenues greater than expenses? Then you have a positive cash flow.
Calculation example: An entrepreneur receives € 30,000 in turnover in a quarter and spends €20,000 on purchasing and costs. The cashflow is € 30,000 - € 20,000 = € 10,000 and positive.
Your business must generate sufficient income. As a guideline, banks maintain a minimum limit of € 30,000. For a general partnership (vof) this is per partner. For a spouse firm, it is € 45,000 together. For a bv, a usual wage of at least € 48,000 applies in 2022. A lower income may be sufficient for you. You must convince your financier that you can meet your private obligations with that (temporary) lower income. Making a private budget (in Dutch) helps to prove this.
Entrepreneur and company
Your way of doing business influences the viability of your company. Therefore, take a critical look at the way in which your company is organised. Also, look at it through the eyes of a financier. In addition to the figures, they also look at what kind of entrepreneur you are and what your company stands for. They want to hear your vision for the future and your strategy. They also want to know more about your experience, education, industry knowledge, network, and partnerships. The financier will want to know more about your company's legal form, activities, management information system, and Key Performance Indicators (KPIs).
Finally, environmental factors play a role in determining the viability of your company. These are developments that lie outside your company. They can present opportunities such as new technology, but also threats such as forced closure due to government measures. You have little influence on most of them, but you can take them into account.
Consider trends and developments that have an effect on your industry. For example:
- demographic factors, such as age, growth, and size of the population
- ecological factors in climate and energy
- socio-cultural factors, including lifestyle and social trends
- economic factors, such as the economic climate and purchasing power
- political-legal factors, including legislation and the extent to which the government intervenes in the economy.
Always plan or show how your company responds to environmental factors.
If you go through all the factors, you can estimate the viability of your company. Do you score positively on the 5 financial factors? Then your viability looks good. There must also be sufficient prospects for non-financial factors. Keep in mind that a financier usually looks more closely at these factors than an entrepreneur. And each financier uses their own numbers and percentages to weigh the value of each factor.
Do you expect to get a higher score in the future if you make some changes? Then continue doing business. Do you expect insufficient improvement? Then ending your business may be the right decision.
Business in Trouble Resources
If you have financial problems, look at the Business in Trouble checklist. Or, if you're looking for tips to make your business more financially viable, check out the KVK Zwaar Weer Routewijzer (in Dutch).
Help increases your chances of financing. With the right advisor and good financial arguments, a 'yes' to your financing application could be within reach. These advisers will help you on your way.