I frequently use a metaphor of a chair when I advise entrepreneurs. I compare the viability of a company with a four-legged chair. If any of the four legs is missing, perhaps you can keep sitting on the chair for a while, but when you lose balance you fall. When two legs of the chair are broken, then a fall is sure!
What are the four legs of the viability of a company?
THE FIRST LEG OF THE CHAIR: TECHNICAL VIABILITY
This is about entrepreneurs or their teams who dominate the production process. The means of production and the appropriate technology should be available, and entrepreneurs should be able to own it. As a conclusion the company should be able to produce something that works.
The technical viability leg is usually the first thing that entrepreneurs achieve, because entrepreneurs normally start a business on something that they control and that they have knowledge in. However, this is not the case for some entrepreneurs and their business projects start limping from lack of technical viability.
An entrepreneur wanted to develop and to sell an innovative tool for household recycling. She had no technical knowledge about such products. It seemed reasonable that she tried to acquire such knowledge, collaborate with someone who has them, or at least buy it. But if somebody doesn’t know anything about a technology, it is very difficult for them to interact with a technology centre or company to request the development of a product. The entrepreneur had difficulty in defining the parameters of the product she wanted. So her project did not have the technical viability, she should have acquired it and that takes time.
THE SECOND LEG OF THE CHAIR: COMMERCIAL VIABILITY
It consists in checking that there is enough market for the product or service you want to sell and that your company will be able to sell enough to make money. The way to study whether a business project is commercially viable or not is studying the market. A good way to study the market is to show the product or service to potential customer or at least to show them a prototype.
An entrepreneur from a technology-based startup wanted to test the commercial viability of his project. He wanted to offer a product made of nanoparticles and obtained by an innovative manufacturing process. This process allowed manufactured nanoparticles which were barely used in some sector due to its high cost. Thus, there was a clear product demand. The entrepreneur had not yet the means of production. In these kinds of projects (innovative and technology-based projects) the difficulty to test the market is very high.
To find out if his potential customers were interested in his product, he did the following. He got the collaboration of a university laboratory, which allowed him to use their facilities. He did a product test following his innovative production process. He took pictures of the raw materials and the outputs with a electronic microscope. He was careful not to reveal the keys to its patent pending production process. Finally, he packed the product obtained and he placed a label with the technical name of the product and his company logo. Then he met several potential clients and showed them his technical photographs and the final product in a commercial format, which was attractive because the product was properly packaged and labelled. Potential customers could quite realistically know what the product looked like. Some of them, showed great interest and they told him their potential quantity of orders. He even dealt with a couple of them about prices, quantities and delivery deadlines. This way the entrepreneur began to see that his project had some commercial viability.
THE THIRD LEG OF THE CHAIR: ECONOMIC VIABILITY
This happens when total incomes, sales typically, are greater than all the expenses and therefore the business generates profits.
An entrepreneur in a technology-based company had studied the market, talked to potential customers and even had made a pre-sale of his product. However, he had difficulty performing forecasts of results. Therefore, he developed several sales scenarios and the resulting costs associated. Then he calculated the economic performance of each of them. This exercise did not ensure viability, but it helped the entrepreneur to think what would happen in each situation and how to deal with each case. He was better prepared to push through his start- up.
THE FOURTH LEG OF THE CHAIR: FINANCIAL VIABILITY
It’s about seeing if the receipts coming into the company are higher than all payments, including the repayment of loans. Financial viability has to do with maintaining a positive cash flow as I explained in the post The metaphor of the tub (Part 2 ): ” Cash is king”
A business project can be economically viable but financially unviable, as it shows the following case:
A few years ago I worked with a company that developed some innovative electronic identification products. Its main clients were several public departments from different regions of Spain. After several years of product and business development, the company achieved that sales surpassed all expenses and it was economically viable. However, the public clients took many months to pay and the company needed to pay in cash to buy materials to manufacture their products. The company also had to give back loans, which had been necessary to finance the investments. For this reason, it could not cope with the payments, it fell into bankruptcy and unfortunately disappeared. The company failed due to financial unviability.
The four legs of viability and the business plan
The four legs of viability are also the pillars of the business plan. It is what the Business Plan tries to test:
- Technical viability is tested in the section of the business process.
- Commercial viability is studied in the Market Analysis and Marketing Plan
- Economic and financial viability is studied in the Financial Plan.
But do not forget that the most important factor of viability of a company is who sits in the chair: THE PERSON. The entrepreneur and his team are those who will make a company viable and they will move it forward with their skills, effort and passion.
Do you think that these four aspects and the human factor are the most important in the creation of a company? Do you think there’s something more important? If so, your comments are welcome.
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