Earnings expandable section
EBITDA is a commonly used measure of earnings or underlying profit. It is calculated by adding back depreciation, amortisation and interest to the net profit, to which we then deduct dividends or drawings when assessing viability.
If your EBITDA exceeds the demands on earnings consistently over a number of trading years, then that is an indicator of viability. EBITDA is not the sole measure and has its limitations but it is a good start in the evaluation process.
There are variations on how EBITDA can be calculated, but for simplicity an example EBITDA calculation is:
| Items / Amounts | Year 3 | Year 2 | Year 1 |
Items / AmountsNet profit before tax | Year 3200 | Year 2300 | Year 1400 |
Items / Amounts+ Depreciation and amortisation | Year 3100 | Year 2100 | Year 1100 |
Items / Amounts+ Interest | Year 360 | Year 250 | Year 150 |
Items / Amounts- Drawings / Dividends | Year 3250 | Year 2225 | Year 1225 |
Items / Amounts(A) Adjusted Profit “EBITDA” | Year 3110 | Year 2225 | Year 1325 |
In this example over three years the EBITDA has reduced. We then need to consider the demand on the business’s earnings such as loan payments, interest, and hire purchase payments.
| Item / Year | Year 3 | Year 2 | Year 1 |
Item / YearInterest | Year 360 | Year 250 | Year 150 |
Item / YearBank capital repayments | Year 3100 | Year 2100 | Year 1100 |
Item / YearHP and Other Loan capital repayments | Year 375 | Year 275 | Year 175 |
Item / Year(B) Debt to be serviced | Year 3235 | Year 2225 | Year 1225 |
Surplus or Shortfall
| | | | |
(A) - (B) | -125 | | 100 |
In this example the business's EBITDA is in decline, yet the demands on its earnings remain significant. In Year 3 there is a material shortfall.
Whist this calculation offers a guide to viability, please be aware it does not include net movements in working capital (stock / debtors / creditors), tax paid or business investment such as capital expenditure not funded on HP.
Rather than focussing on EBITDA, a more complete picture can be formed by calculating the Cash Flow available for Debt Service (CFADS) which means your EBITDA plus or minus net movements in working capital, less tax paid and capital expenditure paid (net of capital expenditure funded by asset disposals and/or hire purchase and/or finance leasing).
Financial Projections expandable section
Forward looking statements, such as projections, prepared on an integrated profit and loss, balance sheet and operating cash flow basis can, when using reasonable assumptions, support the understanding of the impact of decisions you can take within your control (such as capital expenditure or gross margin adjustment) and the impact of risk factors outside your control, such as an increase in a key cost.
FAQs
What Are the Things to Consider in a Product Viability Analysis?
- Identify the strengths of your business. ...
- Analyze the weaknesses. ...
- Identify business opportunities. ...
- List the threats to your business.
Viability starts with Earnings, however there are other aspects to consider including Cash Flow, Net Worth and Balance Sheet Strength, Financial Projections, Financial Trends and Non-Financial Factors. Finally having a trusted Financial Support Team around you is valuable.
What is the viability statement? ›
The viability statement is about the company's. ability to manage plausible “what-if” scenarios, not whether the. company can avoid liquidation in a given time period (see page. 2). Its more subjective nature makes the supporting narrative.
How do you assess the viability of an idea? ›
In testing the viability of your proposed idea you may want to check whether you could answer the following questions: What are all the advantages or benefits of the idea? Is there a real need for it? Have you established some of the problems or difficulties your idea is expected to solve?
How do I know if my product will sell? ›
7 Ways to Determine Product Viability Before Launch
- Test Whether the Product Will Sell. ...
- Engage with Potential Customers. ...
- Ask People to Consider Buying Now. ...
- Harness Insights Through Market Research. ...
- Remain Positive. ...
- Become the Customer. ...
- Conduct an Extensive Competitive Analysis.
A viability study evaluates a proposed project or commercial venture to see if it has the potential to succeed financially and technically. It often involves a market research, a competitor analysis, an operational and financial requirements evaluation, and a management team evaluation.
What are examples of viability? ›
ability to live, especially under certain conditions: The viability of a fetus outside the womb has increased dramatically with the advent of new technologies and procedures. the capacity to operate or be sustained: The viability of the company was guaranteed by the success of its new product.
What is the formula for calculating viability? ›
To calculate viability:
If both live and dead cell counts have been recorded for each set of 16 corner squares, an estimate viability can be calculated. Add together the live and dead cell count to obtain a total cell count. Divide the live cell count by the total cell count to calculate the percentage viability.
What are the examples of viable? ›
Examples of viable in a Sentence
a viable solution to the problem He could not suggest a viable alternative. Is she a viable candidate?
What is a viability test? ›
A seed viability test is defined as any technique used to determine whether individual seeds appear to be dead or alive within a sample, which enables the proportion of live seeds in a population to be estimated (Gosling 2003).
Viability refers to the strength of the balance sheet—whether a company can deliver a return for the owner(s), while also generating enough cash to cover interest payments. Of course, it's no accident the portion below is in green. Generating a Revenue Stream is essential.
What is a viability plan? ›
A viability plan is a written document which specifies all the aspects related to starting up. Though there is not a standard format most entrepreneurs choose to include most of the following chapters. Introduction summary: A presentation of the project, as well as the exposition of the business activity.
How do you understand viability? ›
Viability assessment is a process of assessing whether a site is financially viable, by looking at whether the value generated by a development is more than the cost of developing it.
How do you know if an idea is viable? ›
“Taking the time to validate the viability of your idea is a critical step in being a good entrepreneur.”
- Unique Value Proposition. ...
- Hone in on a Business Problem. ...
- Consult Those Who Will be Candid with You. ...
- Competition. ...
- Results of Others. ...
- Talking to Potential Customers. ...
- Access to Resources. ...
- Business Model.
Fetal viability is the ability of a human fetus to survive outside the uterus. Viability depends upon factors such as birth weight, gestational age, and the availability of advanced medical care.
What are the four steps of the evaluation process? ›
Evaluation can be thought of as a set of linked activities, and the process for undertaking an evaluation includes four main phases – planning, development, implementation, and action and improvement. Within each of the 4 broad phases, there are 9 basic steps for conducting an evaluation.
What are the factors to consider when evaluating viability? ›
The viability of a business is determined by a combination of various factors including, but not limited to, market demand, competition, financial stability, operational efficiency, and the quality of the management team.
What criteria do you use to evaluate the viability of products? ›
Product-focused criteria
Demand/Need - Assessing the demand and need for a product is crucial. Interview existing and potential customers, conduct surveys, and consult the sales team. Consider product synergies and determine if the demand is recurring or one-time.
What are the methods of financial viability? ›
One of the simplest ways to test a concept's financial viability is to perform a break-even analysis. This is a calculation that shows how many units you need to sell or how much revenue you need to generate to cover your fixed and variable costs.
