Financial sustainability is often used as a key concept to ascertain the stability of organisations. Financial sustainability for organisations means their ability to generate sufficient revenue to meet working capital needs and other expenses, invest in growth, and withstand economic downturns. Achieving financial sustainability is essential for all organisations - be it a business, non-profit, or public sector entity. This article covers the various strategies organisations can use to achieve financial sustainability.
Strategies for financial sustainability in organisations
Create a strong financial plan and focus on budgeting
Organisations that work with a well-structured financial plan are better equipped to anticipate future expenses and allocate resources accordingly. Such organisations are also prepared for economic fluctuations and market downturns. Budgeting income and expenses helps organisations to ensure that financial resources are used efficiently. Organisations can set realistic financial goals that align with their objectives and create detailed budgets based on revenue forecasts. They should also review financial performance at regular intervals and adjust the budget as and when needed. Lastly, organisations must create contingency plans to handle unexpected emergency expenses like lawsuits, economic slowdowns, or client loss.
Maintain steady revenue streams
A steady revenue stream is critical for organisations that want to achieve financial sustainability. This goal can be achieved by building multiple revenue sources instead of depending on a single stream. Organisations that depend on one stream of income risk financial instability if that income source is lost. To avoid financial risks, organisations can expand into new services and products to create multiple income streams. They can also branch out into new markets and industries to reduce the industry-specific risks. Organisations can also obtain loans from NBFCs and banks to fund such revenue stream expansions.
Ensure steady profitability
Profitable organisations have higher chances of becoming financially sustainable. While multiple revenue sources can boost overall income, profitability depends on factors like operational costs and product pricing. Organisations have to focus on setting up the right profit margin for their products and services. If the profit margin is too high, they can lose customers to competitors with lower margins. However, if the margin is too low, they will experience cash flow disruptions and revenue deficits since low profits leave no room for expense fluctuations. A balanced approach is needed. Conducting market research, analysing competitor pricing policies, and reviewing their own fixed and variable costs can help organisations determine the right pricing levels.
Create cost efficiency in operations
Excess costs can drain the financial resources of an organisation, threatening financial sustainability. Organisations can efficiently manage costs in operations by carefully reviewing their budgets to find unnecessary expenses to eliminate. They can conduct regular financial audits to identify areas where efficiency is lacking and make policy adjustments. Similarly, they can also consider automating certain repetitive tasks like scheduling and customer service to reduce wage and salary expenses.
Use technology for better financial management
Organisations can achieve financial sustainability by using modern tools and technologies that boost efficiency. For instance, they can rely on accounting software tools for real-time financial tracking. Similarly, they can introduce AI-powered data analytics tools to effectively predict future trends and plan accordingly. Organisations can also use automated invoicing and expense tracking tools to ensure immediate client invoicing and eliminate unnecessary expenses from the budget. They can also leverage cloud computing software to offer remote working benefits to employees and save on office lease costs and infrastructural expenses.
Improve cash flow management
Achieving financial sustainability means improving the cash flow management of your organisation. Organisations that have a healthy and steady cash flow are better equipped to remain financially stable in the long run. On the other hand, poor cash flow management can result in liquidity problems and working capital shortages. Organisations can improve cash flow by collecting accounts receivables faster. They can follow up on delayed payments and offer discounts on early ones to encourage faster payments by clients. They can also consider shortening the payment cycle to ensure clients pay their dues faster.
Create contingency plans
Financial sustainability is about staying afloat even during emergencies and economic downturns. Organisations must plan for such circumstances ahead of time and allocate budgets to manage them effectively. For instance, they can create special financial reserves that can help tackle emergency situations like low cash flows due to low off-season demands or market fluctuations. They can set aside annual profits into a cash reserve that’s designed to help manage operations during such emergencies. Similarly, NGOs can also create such reserves and leverage them when there is a grant shortage or delays.
Manage debt efficiently
Organisations often rely on debt financing lines, credit lines and business loans from NBFCs and banks to fund growth operations and meet day-to-day operational costs. In order to achieve financial sustainability, organisations have to manage this debt burden effectively. For starters, they must avoid excessive borrowing and apply for credit only when it is essential. Maintaining a healthy debt-to-equity ratio (not more than 2) helps attract investors as they view the organisation as capable of handling debt efficiently. They must also ensure that the loan repayment structure aligns with their cash flow projections. In case of sudden cash flow disruptions or reduced profitability, they must refinance high-interest loans to reduce debt-related expenses.
Summing it up
Organisations can achieve financial sustainability if they follow the strategies outlined above. Creating a budget, strategically planning expenses, reducing costs, and incorporating technology for financial management are easy ways organisations and companies can remain financially sustainable for the long term. Similarly, introducing multiple products and entering into different markets like online marketplaces helps them diversify income, maintain healthy cash flows, and ensure prolonged profitability. All these steps can bring organisations closer to their goal of financial sustainability.