Financial stability in business terminology refers to making enough money from your operations to pay for your regular business expenses and feeling that the long-term financial success of your business is secure. Having financial stability is important since it ensures you can continue to pay your business expenses and handle potential downturns in the market as well as take advantage of opportunities to expand.
You can take a look at your business's financial statements to determine your current financial position and then take actions to improve financial stability.
The financial stability of a company refers to its ability to generate healthy profits, avoid heavily increasing expenses and have a better chance of long-term success.
Business Definition of Financial Stability
The definition of financial stability in business goes beyond just making good money through sales. It indicates that your business continues to grow more profitable while your expenses stay mostly the same or see little increase.
A financially stable business will not rely too heavily on debt, will use its assets efficiently and will have a healthy profit margin on its sales. Such a business will usually have an emergency fund on which to rely in times of difficulty so that there's less of a risk of having to shut down based on economic factors. In addition, the business has a healthy number of repeat customers that helps bring in steady revenue and allows for lower customer acquisition costs.
Importance of Financial Stability
While you'll always want your business to be financially stable, it especially comes in handy when the economy or market conditions deteriorate. If sales were to slow down in a recession, you should be able to tap into the emergency fund to pay your bills until sales can improve.
Financial stability is also important since it provides opportunities for business expansion and growth. When your company continually sees increasing profitability, you can afford to add to your product line or even open up an additional shop in a desirable location.
Financial stability is also important to lenders, business partners and investors. If your company ever needs to borrow money through a small business loan, for example, lenders usually want to see a statement of financial stability that shows that your business has sufficient cash flow and isn't heavily indebted already. General investors and business partners will also want to see proof of financial stability to decide whether it's a good move to work with you or put money into your business.
Assessing Financial Stability in Business
To get an idea of your company's financial stability, it helps to take a look at a few key financial statements, starting with your profit and loss statements. Looking at quarterly or year-to-date profit and loss statements for several periods or the last few years will give you a picture of how your operating revenues and expenses have changed over time. This can show you whether you're becoming more profitable while not having a large increase in expenses.
You can use your past income statements to determine your profit margin and changes in net income to verify increasing profitability and growth. Your balance sheet will give you a clear picture of your liabilities and assets so that you can verify your emergency cash funds and determine whether you should pay down some of your debts.
You can also gather information from your financial statements to calculate some key ratios that indicate your business's efficiency, profitability and reliance on debt. For example, your debt to total assets ratio — your total liabilities divided by total assets — shows you how leveraged your company is. Your net profit margin — your net income divided by total revenue — helps you assess profitability after expenses.
Improving Financial Stability
When your small business is new, it will usually take time to achieve financial stability. A few key steps you can take to help with the process include paying close attention to your expenses and focusing on building relationships with customers to generate more recurring revenue. It is much cheaper to keep old customers than it is to acquire new ones.
When considering growth opportunities or making nonessential purchases, first ensure that your company has a healthy emergency fund so that you don't risk immediate business failure if something goes wrong.