Introduction
All states, irrespective of their political-economic system, desire a healthy and viable economic and corporate system. Since the fall of the Soviet Union, most of the countries around the world have adopted liberal economic model/system, with the objective to improve quality of economic and intensify business/economic activity within the country. For achieving the said objective, countries devised policies that were based on free-market, in which firms were facilitated, indirectly, so that they could evolve and increase their capacity to exploit economic opportunities. One such policy was to improve the business environment and enhance banking system (easy loans for Small Medium Enterprises). However, some political-economic systems attempted to regulate industries and markets, because 1) local industries/firms could not compete against more matured and evolved foreign industries/firms and 2) capitalist markets were imperfect (flawed hidden-hand theory).
Financial Viability
As per prevalent corporate/economic understanding, financial viability is an ability, of a firm, to generate income (enough), which not only allows it to meet its operating cost and debt commitments but also facilitate a firm to expand and evolve. In a contemporary corporate system, which is based on the principles of free-market, a firm must be financially viable to survive. The competition, in a post-modern corporate system that is also global, is intense, which is why only those firms can survive, which are financially viable.
A firm is financially viable, when it earns, from selling products or services, enough to survive. A firm, which operates in a particular industry, earns by selling products or services. In a particular market, a firm is a price taker, while in other markets it is a price maker. It primarily depends on the industry or market. For instance, in the perfectly competitive market, a firm is a price taker, and it earns zero-profit in the long run. However, even in this hypothetical market, a firm generates enough income to stay in the industry; if it fails to earn enough, it leaves the industry. Another example is of monopolistically competitive market and industry, in which firms are price-makers; however, the demand curve is responsive to price (upwards). In all industries and markets, the firm must earn enough.
As the economies of the world have globalized; therefore, the competition has intensified further. Manufacturing, for instance, in developing countries is inexpensive in comparison to developed countries, which has made quite difficult for industries and firms, of developed countries to compete; therefore, some of the industries, which profit have dwindled drastically, moved their operations to foreign economies. In most cases, the objective was to earn high profits; however, in some cases, the decision was taken purely to ensure the survival of a firm.
Competitive Market
The globalization of economies has intensified competition in global and local markets. As the competition has intensified, the margin of profit has reduced, as we know that competition reduces producer’s surplus and increases consumer’s surplus. Also, because of the competition, income, generated by firms, also dwindles. We know that income is directly related to a firm’s financial viability for instance, when income decreases to the point where a firm is no more in a position to meet its operations, it becomes financially unviable. Therefore, the transformation of local and international markets into highly competitive markets, from lucrative and imperfect markets, must be concerned (Britt, 2007).
As per projections, of various studies of nature and transformation economies and markets, as long as neo-classical economics prevails, free trade will grow, which will provide opportunities for international firms to operate in local markets. It will put extraordinary pressure on local firms or local producers (Cohen, 2007). However, intense competition is extremely beneficial for the economy as it not only forces innovation upon the firms that exist in the industry but also it ensures efficient use limited resources.
The bulk of the studies infers that governments should devise such policies, which ensure that industries and markets are competitive and for that central banks focus on matters related to credit/loan issuance (capital structure). Governments focus on expanding economy (intense business activity) and qualitatively improving the economy (through FDI inflows and such other means). However, the objective of developing competitive markets and industries goes beyond the financial viability of the firm.
Sustainable Economic and Business Activity
The concept, of sustainable economic and business activity, is directly associated with the financial viability of businesses. It means that firms are 1) generating income to meet their operational finances and 2) earning a profit, economies grow. For instance, when a firm earns abnormal profits, it expands. This expansion, at the macro – level, increases general employment level and because of that consumption increases (multiplier effect). Studies reveal that aggregate consumption is the engine of economic growth, which means that consumption intensifies business activities. When markets are competitive, and firms are self-sustaining or financially viable, economies grow at an impressive rate in such manner that healthy, of the overall economy, improves. When businesses establish mechanisms to generate income for longer periods, they become self-sustainable, and they positively contribute to the economy. Therefore, financial viability (income generating operations) is truly essential for sustainable economic and business activities (survival and profit) (Great Britain: National Audit Office, 2012).
For any government, unemployment is one of the prime concerns. Therefore, when businesses no more remain unsustainable or financially viable, governments offer subsidies. In the short-run, these subsidies ensure that the employment level remains high; however, in the long run, subsidies adversely affect an economy. For instance, firms, of a particular industry, become less sensitive towards cost and because of those intra-organizational operations and mechanisms never evolve, which are essential to ensure reduction of cost of operations and for the improved quality of product or service. It leads to unhealthy economic and business activity, which puts additional pressure on taxpayers and process of innovation slows down (Usharani, 2008).
Conclusion
In the end, it is concluded that for any firm, which operates in contemporary corporate/economic system, financial viability is essential. If it is not financially viable, it will not survive in the globalized corporate system. However, to ensure financial viability, a firm has to devise a potent strategy, which should focus not only on selling of products and services, but also for the customers or clients, as focusing on client or customers naturally ensures additional income, which is required for the expansion.
Governments can play a positive role in improving the business environment. Also, it can influence the Central Bank to devise expansionary monetary policy and ease the process of issuance of loans through private banks. However, it should abstain from regulating markets and offering subsidies, as such policies are detrimental to the economy in the long run.
References
Britt, D. (2007, September 17). Impact of Globalization in Creating Sustainable Competitive Advantage. Retrieved from https://www.sdcexec.com/risk-compliance/article/10289694/impact-of-globalization-in-creating-sustainable-competitive-advantage
Cohen, P. (2007, July 11). Economists question dominance of free-market ideas. Retrieved from The New York Times: https://www.nytimes.com/2007/07/11/business/worldbusiness/11iht-economics.1.6609966.html
Great Britain: National Audit Office. (2012). Financial viability of the social housing sector: introducing the Affordable Homes Programme, Department for Communities and Local Government. The Stationery Office.
Usharani, K. (2008). Marketing Strategies & Financial Viability Of Self Help Groups (1 ed.). Sarup & Sons.
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