7 Key Principles of Financial Sustainability

The concept of financial sustainability refers to one’s capacity to handle money in a way that ensures stability and long-term growth. This concept is applicable to both individuals and corporations. It addresses things like controlling cash flow, foreseeing unanticipated events, adapting to changes, and finding a balance between income and expenses.

Achieving financial sustainability is critical for an individual since it helps you stay prepared for any future economic challenges. For businesses, financial sustainability is essential to keep running operations smoothly and attract investors. To achieve this objective, individuals and businesses have to understand the following seven principles of financial sustainability:

Sound financial planning

You cannot achieve financial sustainability without a solid financial plan in place. This principle is applicable to both individuals and businesses. Without a financial plan, businesses and individuals stand to mismanage their funds, overspend, or simply fail to allocate resources effectively. A well-structured financial plan helps reduce uncertainties and ensure long-term financial sustainability.

• For an individual: A well-structured financial plan covers various aspects, including budgeting for future needs and expense monitoring to avoid lifestyle inflation. A potent financial plan also includes strategies for cash flow management and contingency planning.
• For a business: Creating a financial plan for a business means forecasting revenue, reducing operational costs, and investing wisely.

Creating multiple revenue streams

The second principle of financial sustainability focuses on the need to diversify your income sources. Without multiple income sources it can become challenging to maintain financial sustainability in times of an economic downturn and unexpected slowdowns. Instead of depending on income from just one source, you can take steps to diversify your earnings in the following ways:

• Individuals: You can invest in various asset classes like stocks, bonds, and mutual funds to earn additional income. You can also consider renting out your properties on a monthly basis to generate passive income. Freelancing and side jobs can also help you increase your income.
• Businesses: To increase sales, entrepreneurs may want to think about diversifying their product ranges. It can also be wise to enter new marketplaces as doing so increases your clientele. In a similar vein, providing subscription-based services can bring in more money.

Controlling costs and optimising resource use

Financial sustainability, in the long run, can only be achieved by effectively managing costs and expenses. Eliminating costs does not have to sacrifice the quality or growth of your business, nor does it have to compromise your lifestyle as an individual. There are various ways individuals and businesses can cut costs without making compromises:

• Individuals: Understand how to separate your wants from your needs. Your needs include essential expenses on food, rent, utility payments, and mortgage, while wants are discretionary spending on shopping and dining out. Over time, your discretionary expenses can reduce financial sustainability. Cutting back on these expenses can help you save more and focus on financial sustainability.
• Businesses: For a business, the focus is not reducing costs without compromising productivity. As a business owner, you can undertake various steps to reduce costs, including automating processes to reduce labour expenses. You can also try to negotiate better contracts with suppliers and vendors, get discounts on bulk orders, and more to reduce expenses.

Risk analysis and contingency planning

Financial sustainability needs one to proactively manage risks. You have to identify possible risks and prepare for them beforehand to avoid financial disruptions that can threaten your financial sustainability. For example, you need to have backup plans to handle cash flow during off-seasons if your company depends on seasonal demand. Liability insurance is another investment that businesses may make to prevent problems in the future. Protecting your wealth and assets from financial disasters is another way that you, as an individual, may ensure your financial sustainability. Sudden emergencies like a critical illness diagnosis or job loss can affect your finances. That’s why it is important to invest in life and health insurance plans with appropriate riders and set up a health emergency fund to handle crisis situations. Apart from that, you can also undertake investment diversification to manage financial risks.

Liquidity management

Liquidity means the ability to access cash whenever needed. Financially sustainable individuals and businesses have sufficient liquidity at all times. For instance, if you have sufficient long-term investments but no emergency savings, you may not be financially sustainable. If your company doesn’t have a steady cash flow, even while its profits are steady and increasing, it could not be financially viable. The actions listed below can assist in achieving this objective:

• Individuals: Managing liquidity can be facilitated by setting up an emergency fund equal to six to nine months’ worth of living expenditures. To guarantee quick access to money when you need it, you can also invest in very liquid financial products such as NBFC FDs and recurring deposits.
• Businesses: Businesses can prevent cash flow gaps by increasing the rate at which accounts receivable are collected. If there are delays in payment collection, you should introduce steps to hasten the process by offering early payment discounts and offers as incentives.

Invest in growth and innovation

Financial sustainability is about maintaining stability as well as investing for long-term future growth. For instance, the money you save should be used for investment so that the funds saved from expense reduction help one gain investment returns. In turn, your financial stability can be preserved during the long term through investments in growth. Individuals and businesses can invest in growth by:

• Individuals: Invest in your self-improvement by attending courses or joining skill-related vocational programs. Doing this can help you get well-paid jobs and have a chance to work in better places. You can also invest in assets like mutual funds, stocks, bonds, and real estate to earn wealth through capital appreciation.
• Businesses: As a business owner, it is crucially important for you to concentrate on capacity building. This might also imply investing in R&D efforts, employee training, or acquisitions sometimes.

Managing debt and borrowing responsibly

Over-relying on debt can harm financial sustainability for both individuals and businesses. While debt can be used for growth and expansion in a business, too much debt represents an extra burden (especially if interest rates are high). Credit cards and personal loans can help fund various purchases on online marketplaces and meet the immediate needs of individuals. However, failing to repay these debts on time can result in high interest expenses, given their high APRs. Borrowing within your means, comparing interest rates before borrowing, ensuring timely payments, and restructuring debt when needed are easy ways to manage your debt burden.

Summing it up

Both people and businesses want to achieve financial sustainability. In order to balance income, expenses, and assets and stay out of debt traps, people must practice wise money management. For businesses like NBFC s, MSMEs, and others, the primary objectives are profit generation, waste reduction, risk management, and sustainable growth. The seven financial sustainability principles stated above are examples of how people and businesses might achieve this goal.