Financial sustainability refers to a company’s ability to profit and grow. Financially unstable companies that do not correct their course risk shutting down. Several factors, such as low profits, determine whether a company is financially sustainable.
Low profits adversely affect cash flow. When an organization records low profits, it has little to no disposable income to invest or even pay employee salaries. The inability to reinvest or retain working capital negatively affects its financial sustainability.
Next, the debt ratio helps determine a company's financial sustainability. When debt significantly exceeds profits, the company becomes financially unsustainable.
Capital is the powerhouse of any business operation. The debt ratio measures a business’s debt to its assets and assesses how much it relies on borrowed capital to carry out its operations.
Finally, access to capital is a key metric in determining an organization’s financial health. The more a company can access capital, the more likely it is to expand operations. Operational expansion might translate into revenue growth.
