Financial sustainability is the ability of a business entity to finance its operations within its set budget estimates. Finance is all about management of funds and money. The management of an organization has to carry out the activities of origination, marketing and management of cash through various capital accounts, instruments and markets established for transacting and trading assets, liabilities and risks. Financial sustainability is both an art and science. As an art it involves development of products to ensure that a business has ready and available products for sale at all times. As a science, it involves measurement such as financial performance measures which look at the efficiency and profitability of an investment, debtor’s safety and claims against assets (CGAP, 2006).
Financial system includes both the public and the private interests and the markets that serve them. This provides capital from individual and institutional investors to an organization or a business entity. A business entity should have elaborate financial systems to ensure its financial sustainability through its operations. Apart from its profits, a private business can ensure its financial sustainability through debt capital, corporate and government’s notes and bonds, mortgage securities and other credit instruments. Equity capital is another way of ensuring financial sustainability; this is selling of listed and unlisted business’s shares (Yaron, 2002).
These are activities involved in providing funds for a business’s activities. It generally involves balancing risks and profitability at the same time maximizing the business’s wealth and the value of stock. Managerial decisions affect a business’s financial sustainability. There are generally three interrelated decisions which affect a business’s financial stability (Schreiner and Yaron, 2001).
First there is ‘the investment decision’ management must decide on the projects to undertake, issue of capital budgeting should be taken into consideration. The management should therefore be able to do a valuation on the project to determine its worthiness. Secondly, there is the financing decision, this relates to how the investments are to be funded, the management should be able to decide on the source of finance equity, creditors in form of bonds and other securities. The third decision is dividend decision, this requires the management to determine whether the shareholders will be given any of the business’s profits or it will be retained for future investments and projects. This decision should be involved in short-term financial management, which is cash, inventory and debtors management. Financial decision should ensure a business has enough funds now and in future (Womack and Jones, 2006).
Financial risk management
This is the practice of creating and protecting the economic values of a business by using financial instruments to manage exposure to risk, especially credit risk and market risk. It looks on when and how hedge by use of financial instruments. Financial risk management involves identifying its sources, measuring it, and coming up with plans to deal with it and can either be qualitative or quantative. Proper risk management will ensure that will ensure that a business is able to realize a threat in its financial sustainability and will be able to address it in advance (Yaron, 2002).
Finance is one of the most important aspects that the management should be concerned with as it involves making decisions related to the use and acquisition of funds for the business entity. A business which operates on a surplus budget, income exceeds its expenditure can lend or invest the excess income. This ensures that the business will be financially stable now and in future.
CGAP, (2006). Good Practice Guidelines for Funders of Microfinance. Microfinance Consensus Guidelines. Washington: CGAP.
Schreiner, M. & Yaron, J. (2001). Development Finance Institutions: Measuring Their Subsidy. Washington: World Bank.
Womack, P., & Jones, D. (2006). Lean Thinking. New York: Simon & Schuster.
Yaron, J. (2002). Assessing Development Finance Institutions: A Public Interest Analysis. Washington: World Bank.