Determine the viability of your business

What is a viable business?

A viable business is one that operates with a profit for an extended period of time. It can also meet its financial and organisational obligations.

Gain insight

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 the factors that determine financial health, you can make better decisions about the next steps.

Next steps might be, for example, reducing your costs, adjusting your revenue model, or 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 that insight yourself, you are in a better position to ask for financing. Financial advisors such as a bookkeeper or accountant can help you with this.

A tool to gain financial insights

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.

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Calculating financial ratios

You can determine viability based on financial and non-financial factors. You first calculate financial ratios. You look at figures about profitability, assets, liquidity, cash flow, and private income. With these numbers, you can make ratios or calculation modules. From these, you can determine viability.. You get these numbers from your profit and loss accounts and balance sheet, which together form your annual accounts. Non-financial factors affecting viability concern the entrepreneur(s), the company, and environmental factors. 

Cost-effectiveness

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 professional partnership (maatschap), part of the profit goes towards paying an entrepreneur's allowance for the work they do. In the calculation example below, the guideline for this is €30,000.

Calculating cost-effectiveness

1. Take the net profit + interest paid. From this, subtract the entrepreneur's allowance.
2. Divide the result by the average total capital employed.
3. Multiply the result by 100%.
4. The result is cost-effecgtiveness.

As a mathematical formula, this is: (net profit + interest paid - entrepreneur's allowance) / (average total invested capital) x 100% = cost-effectiveness.

Calculation example for  a sole proprietorship: ((40,000 + 2500 - 30,000) / 50,000) x 100% = 25%

Calculation of cost-effectiveness for a private limited company (bv)

In a bv, the work of the entrepreneur(s) is already rewarded via a salary or management fee.

1. Take net profit and add interest paid and tax on profit.
2. Divide this by total assets.
3. Multiply the result by 100%.
4. The result is cost effectiveness.

As a mathematical formula, this is: ((net profit + interest paid + tax on profit) / total assets) x 100% = cost effectiveness.

Calculation example bv: ((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 cost effectiveness.

Table: Sample balance sheet

Solvency

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.

Calculating solvency

You divide your equity by total assets. You multiply the result by 100%. The result is solvency. 

As a mathematical formula, this is: (equity / total assets) x 100% = solvency

Calculation example (with numbers from the sample balance sheet): (55,000 / 170,000) x 100% = 32%

Liquidity

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.

Current ratio

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

1. Add current assets (including accounts receivable) to cash and cash equivalents.
2. Divide the result by the current liabilities (current account overdrafts and creditors).
3. The result is the current ratio.

As a mathematical formula, this is: current assets + cash and cash equivalents / 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

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.

Calculating quick ratio   

1. Add debtors to cash.
2. Add overdrafts and creditors.
3. Divide the result of 1 by that of 2.
4. The result is the quick ratio.

As a mathematical formula, this is: 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 money you can use to pay bills. It is money to use on a daily basis in your company and is therefore called 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. 

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

Cash flow

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 revenues greater than your expenses? Then you have a positive cash flow. Are your expenses greater than your revenues? Then your cash flow is negative. You will then need additional financing or you must cut your costs.

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.

Private income

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 €56,000 applies in 2024. 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 helps to prove this.

Entrepreneur and environment

Your way of doing business influences the viability of your company. This is also the case for environmental factors.

Entrepreneurship

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 are interested in your vision for the future and your strategy. They want to know more about your experience, education, industry knowledge, network, and partnerships. Financiers also look at your company's legal form, activities, management information system, and Key Performance Indicators (KPIs).

Environmental factors

Environmental factors are developments that lie outside your company that you cannot control yourself. 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. In your planning, think about how you can respond to environmental factors such as: 

• 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. 

Conclusion

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. The KVK step-by-step guides show you what your options are. 

Business in Trouble: step-by-step guides

Are you having financial problems and want to get a grip on your business again? Or are you in doubt about continuing or quitting? KVK has step-by-step guides to help you on your way:

• Continue or quit - take stock and think about whether you can continue or if it is time to stop, 
• Ending in a controlled way - no matter how difficult it is, stopping appears to be the only option. Look at how to handle things properly,
• Dealing with debts - you have problematic debts and are looking for a solution. Find out how to solve debt and who can help you.

Help with financing

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. Use the financing flowchart to choose an appropriate type of financing and increase  your chances of securing funding.