economic viability

We know that the choice of governance bodies + the quality of institutional structures have a significant impact on the ability of
companies and economic-social systems to survive over time.

Choices made by enterprises through the interaction of governance bodies with the management of the firm + the shareholder must
be aimed first of all at guaranteeing continuity, the adequate remuneration of all production factors, including risk capital + balance
the tendency of the governance and management bodies to aim for short-term results with the goal of ensuring long-term continuity.

=> We will look at economic viability as a principle to satisfy all the various stakeholder's expectation + meet the obligations you
have toward them as well as being the ability of a company to survive over time without pathologically making use of third party
resources

LECTURE'S GOALS: once having understood what economic viability is and the conditions that have to be met in order for an org.
to be viable, we will look at how to recognize whether an org is: to do so models are generally usually. In particular, we'll look at
annual reports: what it is, the logic behind it, how to build it, how are decisions transformed into numbers and finally how to interpret
it.

Why is it so important?

1. Institutional equilibrium allows for durability, due to the convergence of ≠ stakeholders' interests, a synthesis between short-
term and long-term goals, unitary intent, governance and management. Stakeholders are motivated to share the company's
goals and continuo to make contributions as they know will receive fair rewards

2. Economic activity utilizes and generates resources. To survive, each firm must be able to count on sufficient resources to
remunerate all of the conditions of production + consumption it utilizes to perform its activity, unless other firms are willing to
systematically cover losses

⇒ Possibility to generate adequate resources to sustain growth represents a condition to guarantee a company's autonomy in
developing its goals. Otherwise, the company is strongly limited in autonomously defining its goals and its activity is conditioned
by the conduct and choices of others as you are running the org to pay back the debt rather than for your own goals

3. Autonomy legitimizes + strengthens the institutional structures, facilitating their functioning since if it's not able to survive, it will
have to find another economic actor that will systematically subsidize its economic activity or cover the losses. Thus calling into
question the company's ability to make autonomous decisions

Economic viability is the condition that makes it possible for autonomy and durability to effectively take place
⇒ impossibility to survive over time and to operate autonomously jeopardize an org existence and reason for existence. Without
being viable, in fact, a business would not be able to remunerate production factor and thus to survive. Moreover, if it depends on
third parties, it is not able to control the resource flow, that could be interrupted and call into question the org's survival.

Viability, thus, represents an essential functional constraint for the performance of economic activity over time. Institutional
structures must tend towards the firm's viability, that in turn legitimizes and strengthens the possibility for the institutional structure
to guide the development of the business in a harmonious and autonomous matter. Only thanks to continuity, an org can achieve its
goals

How do you understand whether a company is actually viable? A business is viable when it's in financial equilibrium, i.e. when it is
able to attract and mobilize the resources necessary to remunerate all of the production and consumption factors necessary to
carry out economic activity. May not happen in the short-term => viability is a condition for both functioning and a goal of good
governance.

Necessary for the following criteria to be respected:

ECONOMIC EQUILIBRIUM: use of revenues to remunerate all of the production factors, at market condition, including loan
capital and risk capital, i.e. revenues are higher than costs. It may not be reached in the short-term, but it is not to be
considered pathological. If management is not able to balance costs and revenues in the long term, the org will not operate in
conditions of viability. A fundamental condition to reach it and maintain it over time is that, in addition to the validity of its
entrepreneurial plan, there must be sufficient financial resources to cover the initial investments and sustain initial losses.

EFFICIENCY: firm's ability to use the resources available in the best way possible. Efficient operations allow for maximizing
output produced given the production factors used, maximizing the income created or freeing up resource for operations. It
favors economic equilibrium since for a given level of output, the cost decreases or at a given cost, a higher level of output is
produced and sold

economic viability 1
 APPROPRIATE REMUNERATION: refers to all factor of production, including taxes. Among these, the issue of adequate
remuneration of shareholders and workers is particularly delicate. A company that remunerates production factors not at
market conditions [ex: evading taxes] find the production of income easier, but do not operate within the rules and once they
are discovered they could suffer very significant economic and reputational harm. In the case of remuneration of risk capital,
the risk that arises is linked to poor performance w.r.t. alternative investments + to the difficulty to divest in the event needed +
to the risk of seeing a reduction of the invested capital as a result of poor management. Moreover, economic viability cannot be
reached at the expenses of overall sustainability [agenda 2030]

MONETARY EQUILIBRIUM: expresses the firm's ability to meet payment obligations at any time, thanks to the availability of
monetary resources, i.e. having enough cash to meet short-term obligations. It is out of equilibrium if outflows exceed monetary
inflows. Very much related to economic equilibrium, but the dynamics are not the same. Therefore, you could have a situation
with economic equilibrium, monetary disequilibrium. This is because, it is difficult to reach when costs come well in advance of
revenues or when payment times from suppliers are shorter than payment times by clients or when the business foes not reach
short-term economic equilibrium.
Monetary equilibrium is very short-term, i.e. if you are in disequilibrium you can survive for a low period of time

⇒ goal is to achieve all 4 conditions simultaneously. For example, when economic and monetary equilibrium are not reached
simultaneously, financial operations act to cover the gap: the company takes out a loan to obtain external resources. However, it
requires prudence since indebteness has a cost that negatively impacts the company's capacity to generate income. To achieve
viability in the long-term, it is necessary for the org to maintain constant flexibility, so as to be able to adjust to external and internal
changes.
Conditions described apply to all types of firms in order to reach their institutional goals

FIRMS: adequate rewards for work and capital

FAMILIES: satisfying all members’ needs. Balance between consumption and income from work and asset management is
critical for financial equilibrium

STATE: satisfying citizen needs and adequate rewards of worker. Provision of public services in quantities exceeding the
capacity of tax collection, leads to budget deficits that must be covered with debt. However, some countries are characterized
by high level of debt and this reduces the country's ability to boost development and places strong constraints on spending and
public investments

NON-PROFITS: satisfaction of members’ needs and adequate rewards > however, very often they do not remunerate
adequately work. economic equilibrium heavily depends on the company's ability to obtain stable contributions from the
members or donors since it is unlikely operations will generate income

What is the relationship between economic viability and sustainability?

In general, if a business operates viably, it is economically sustainable. However, economic sustainability must be increasingly
accompanies by economic and social sustainability.

Sustainability (as defined by UN Agenda 2030) is a more ambitious goal and far-reaching concept than economic viability because
you are not only dealing with reaching economic results, but also the social impact produced by the org.
Sustainability explicitly identifies three pillars to be addressed (economic – social – environmental viability) by any firm and focuses
on measuring outcomes as well as outputs. Instead, economic viability explicitly addresses only one pillar, although it incorporates
social viability in the concept of adequate remuneration.
Measurement of economic viability is consolidated: while the measurement of economic viability is well codified, the variety of
indicators used to measure environmental and social impact are still in development phase.
Assessment of environmental effects addresses both negative externalities generated by economic activity (i.e. pollution) and their
compensation, control of supply chain, life cycle management, recycle and reuse. Assessment of social effects still needs to be
transformed into a coherent and agreed upon set of indicators

economic viability 2