Updated: Nov 19, 2020
Meaning of Sustainability
Sustainability is the phenomenon to maintain a specific level without depleting your natural and other resources. It is the situation that every person, business and nation wants to achieve so as to accomplish their goals and to nurture the growth. It is the stage of satisfaction that people, business and nation gets after all the hard work and necessary resources being implied in their personal, professional and national growth respectively. And the phenomenon of maintaining this stage of satisfaction without incurring further extra cost and resources is called as Sustainability.
Business Sustainability is the phenomenon of achieving and maintaining a certain level in the business, after employing all the required resources. This level is the level of growth that thrives to achieve the goals without incurring any extra costs and losses. From the point of view of Business Sustainability, it is referred to as maintain and managing the triple bottom line of business and i.e. Profits, People and Planet.
Profits: The business thrives to achieve its profits by mitigating all the losses and loss generating resources, hence, making it financially sustained.
People: The business thrives to retain its good people and employees by giving them financial rewards and recognition and hence, makes it socially sustained.
Planet: The business thrives to manage the environmental risks and keeps the atmosphere clean with no hazardous leftovers, thus, making itself environmentally sustained.
Financial Sustainability is the sustainability that every business looks for especially and NGO. It is to ensure that there is a regular and proper flow funds in the business. Along with the flow of funds, the flow of resources required to sustain and run the business is also taken care of without any losses and pauses. To run the business and to sustain its pace, proper strategies are to be formed right from the top level to the ground level.
This will be the base for strong foundation and ideas. To cater the dry spell periods (if any), proper and regular management of reserves are needed to achieve financial sustainability. The management of the business should also be aware of any kind of Internal and External Risks prevailing in the business, so as to eradicate such risks and excelling the growth of the business. (Financial Sustainability, n.d.) And, maintain such tasks related to flow of funds and resources, formulation of proper strategies, mitigating the internal and external risks, losses and frauds and maintaining proper reserve base, is referred to as Financial Sustainability.
Financial Sustainability- Four Pillars
Financial sustainability is a stage of dream for all the business organizations. It is not an easy task to achieve financial sustainability in your business. The management has to render certain kind of inputs and hard ships to achieve this stage. It is the stage of great satisfaction when your business or company is generating only profits with no loss at all, have ample resources, proper strategies, a great market share, environmentally viable and above all have ample reserves to face any kind of contingencies (if may happen). And, to achieve this stage there are four pillars that are needed to be built.
Pillar 1: Financial Planning and Strategies
The business has to be clear about the goals that are needed to be accomplished. Also, while forming the goals, it should be clear that how much debt the company has to pay off in how much time. With this, the need arises of knowing the income level needed for a business to pay off their debts in long as well as short term. After knowing all these facts, the management has to form strategies to fulfill this goal of financial income. The strategies includes the prioritization of things to be achieved, mission and vision of the company and to help building a financial plan of the company.
Pillar 2: Diversification of Income
The business cannot rely on a single source of funding. It is always required that at least 60% of the funding required by the business should come from at least 5 different sources. This is called as Diversification of income.
Pillar 3: Sound Administration and Finance
Experienced and Qualified Top management is the base for sound administration. The policies and regulations made by the top management must ensure that all the resources are being used optimally and efficiently without any losses. There should not be any stone left unturned that keeps a capacity to generate income and wealth for the business. Every opportunity should be exploited in a healthy manner.
Pillar 4: Generate your own income
The last but not the least pillar of financial sustainability is to generate your own income. The business should not always depend upon the investors, loans and equity; rather it should also have its own income generated to have a support and a less burden of debt. Thus, these are the four pillars of financial sustainability to be incorporated in the business.
Strategies of financial Sustainability
Following are the strategies of maintaining financial sustainability (Sustainable Finance, n.d.):
- First Plan and then take action is the strategy every business should follow.
- The business should evaluate their financial health and income and make plans accordingly for future actions.
- The business should not depend on only one or two sources of finance; rather, it should have multiple sources of finance.
- There should be ample of reserves kept so as to face any challenge or contingency.
- The business should acquire public finance by listing its company in a stock exchange as generating equity is the major source of finance.
- The debt to equity ratio should always be less than 1, where debt should be much lesser than equity.
- The resources of the business should be optimally and efficiently utilized in order to maximize profits and minimize the losses.
- Major part of the business income should come from its own sources, not being completely dependent on external finance.
- The business should maintain its credibility and goodwill in the market so as to have a long term support of financial institutions and customers.
Plan for developing the Financial Sustainability
As discussed above, financial sustainability is the task to be achieved by every organization to flourish and remain hydrated all over its life. And to achieve this, the business needs to make a plan as follows (Section 1. Developing a Plan for Financial Sustainability, n.d.):
- Evaluate your finances: The first step is to evaluate where you stand. This is critical to know about your company’s financial position.
- Compare your Income and Expenses: Next is to compare your income and expenses. This will give you an insight to the fact whether you are running short of your income to incur business expenses or you have sufficient income.
- Compare your Debt and Equity: Checking out the debt equity ratio is a major part that will provide a figure of your company’s actual financial health. If your debts are more than your equity and assets, the company is sinking.
- Check on the sources of finance: Now, after knowing a complete financial position of your company, you should find out the possible sources of finance to hydrate your company.
- Check on your own source of income: Nothing is fruitful than being your own income. Put a stress on generating your own wealth.
- Make plans: Now make all the strategies and plans that are needed to effectively use the funds and resources to generate high level of profits and paying off all your debt.
- Evaluate the plans: Next is to evaluate the plans made by the business in context of its viability, possibility and efficiency. Check for alternatives also at this stage.
- Implement the plans: Implement the plans as discussed by the top management and check for any kind of deviations and wastages.
- Thrive for your Goals: The last step of financial sustainability is to thrive for the goals accomplishment to achieve an absolute financial sustainability in your organization.
Therefore, this is the plan for developing financial sustainability.
Evaluation of Financial Sustainability
The financial sustainability can be evaluated and measured by performing following ratios as an analysis on the financial statements of the company, after the plan as suggested above is incorporated in the business.
- Net Financial Liabilities Ratio = (Total Liabilities – Current Assets) / Operating Revenue
- Operating Surplus Ratio = Net Operating Surplus / Total Operating Revenue
- Working Capital Ratio = Current Assets / Current Liabilities
- Debt to Equity Ratio = Total Debt / Shareholders Equity
- Debt to Total Assets ratio = Total Debt / Total Assets
- Current Ratio = Current Assets / Current Liabilities
These ratios will provide an insight into the financial health of the company. If the liabilities and debts are still greater than the assets and equity of the company, then the company has not achieved its financial sustainability.
Challenges to apply the Sustainability
Following are the challenges to apply the sustainability in any business:
- Lack of funds is the basic challenge the companies face for achieving financial sustainability. The business generally finds it hard to have good and reliable financers.
- Lack of awareness is another challenge. Most of the business firms and its people misinterpret the meaning of financial sustainability and ends up in doing wrong deeds.
- Public policies are another bouncer for achieving financial sustainability. Some laws and policies make it harder to incorporate some relevant decisions and strategies.
- Collaboration is another challenge the businesses face for achieving sustainability. The need is to tackle the stakeholders and competitors with one voice and that is the task.
- Effectively measuring sustainability of an organization is a challenge as personal judgment and misinterpretation can render hindrances on its way.
- Long term vision is what most of the businesses were slammed of. Because of the uncertain income, some tough initial years and turbulent markets makes it very difficult for the businesses to stay on the path of achieving financial sustainability.
Company Applying Sustainability in UAE
Abu Dhabi Commercial Bank: Abu Dhabi Commercial Bank was founded in 1985 and provides a full functional banking products and services. The major products and services include Retail banking, commercial banking, investment banking, personal banking, corporate banking and foreign exchange etc.
The company aims at becoming financially stable and sustainable venture and to become a number one bank of people’s choice in UAE.
The company also has a 17 year long term vision of making UAE a financial sustainable, environmentally sustainable and socially sustainable by changing its image of being only an oil based economy. (GreenEmirates - Abu Dhabi Commercial Bank, n.d.)
(Note: Report links in foot note)
Researchers Opinion about Financial Sustainability
Patricia Leon: The researcher emphasizes on the four pillars of achieving financial sustainability that includes financial strategies and planning, income diversification, sound administration and generating your own finances.
Lidija Kamaraa, Julie B. Milstienb, Maria Patynac, Patrick Lydona, Ann Levind, and Logan Brenzel e: These researchers emphasized on the strategies of financial sustainability. According to them, the financial sustainability could be achieved by proper planning and budgeting, getting more donors and investors and improved management and planning.
Richa Kumar: The researcher says that the sustainability is to improve your present without affecting your future. Also, sustainability starts with social welfare.
My Own Opinion
According to me, financial sustainability is the reward the business and the nation gets out of their hardships, better judgment, advance planning, and proper evaluation of the situation. Right decision at the tight time is the core of financial sustainability. The business has to evaluate its potential and the current position in order to manage its finances, people and environment accordingly. The right practice in verge of proper evaluation and study can make this goal achievable.
The business has to all time check on its liabilities and the income. If by any chance, the liabilities run out of income then that is the point of taking critical action to sustain the financial health of the company.
Therefore, this is the report on financial sustainability that the businesses should achieve as their vision.
(Note: In most of the cases, the Financial Sustainability is the goal of Nonprofit Organizations and NGO’s.)
Section 1. Developing a Plan for Financial Sustainability. (n.d.). Retrieved January 27, 2017, from http://ctb.ku.edu/en/table-of-contents/finances/grants-and-financial-resources/financial-sustainability/main
Read "Enhancing the Value and Sustainability of Field Stations and Marine Laboratories in the 21st Century" at NAP.edu. (n.d.). Retrieved January 27, 2017, from https://www.nap.edu/read/18806/chapter/7
Top 7 Business Sustainability Challenges in 2016. (n.d.). Retrieved January 27, 2017, from http://nbs.net/knowledge/top-7-sustainability-challenges-in-2016/
Sustainable Finance. (n.d.). Retrieved January 27, 2017, from https://www.cbd.int/protected-old/sustainable.shtml
Mandri-Perrott, X. C. (2013). Public Private Partnerships in the Water Sector: Innovation and Financial Sustainability. Water Intelligence Online, 12. doi:10.2166/9781780401058. < https://www.researchgate.net/publication/283375952_Public_Private_Partnerships_in_the_Water_Sector_Innovation_and_Financial_Sustainability>
Naik, G., P., B. K., & Joshi, S. (n.d.). Financial Sustainability of E-Governance Embedded Rural Telecentres (EGERT) in India. SSRN Electronic Journal. doi:10.2139/ssrn.2117099. < https://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20352.pdf>
Dumestre, M. J. (2016). Financial Sustainability in Troubled Times. Financial Sustainability in US Higher Education, 41-51. doi:10.1057/978-1-349-94983-0_4. < http://download.e-bookshelf.de/download/0007/7040/44/L-G-0007704044-0015784969.pdf>
Towbin, P. (2012). Financial Integration And External Sustainability. International Journal of Finance & Economics, 18(4), 375-395. doi:10.1002/ijfe.1469. < http://onlinelibrary.wiley.com/doi/10.1002/ijfe.1469/abstract?systemMessage=WOL+Usage+report+download+page+will+be+unavailable+on+Friday+27th+January+2017+at+23%3A00+GMT%2F+18%3A00+EST%2F+07%3A00+SGT+%28Saturday+28th+Jan+for+SGT%29++for+up+to+2+hours+due+to+essential+server+maintenance.+Apologies+for+the+inconvenience>
Dobrovolskienė, N., & Tamošiūnienė, R. (2016). Sustainability-Oriented Financial Resource Allocation in a Project Portfolio through Multi-Criteria Decision-Making. Sustainability, 8(5), 485. doi:10.3390/su8050485. < http://www.mdpi.com/2071-1050/8/5/485>  http://www.adcb.com/images/ADCB_Sustainability_Report.pdf https://www.adsg.ae/membership/Documents/ADCB/ADCB_Sustainability_Report_2012.pdf http://www.adcb.com/arabic/images/ADCB_Sustainability_Report_2013_tcm10-38250.pdf