The Only Sustainability that Matters In Business
How do you define “sustainability?” The oft-quoted UN Bruntland commission states that: “sustainable development is
Sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.That’s pretty broad. Ask most people and they have a vague notion of sustainability along the same lines. We are not destroying the environment by using up resources or creating overwhelming pollution. We shift to using replaceable resources like plant materials and look to solar and wind for power. However, having consulted with many small and medium sized businesses, I have a different take on sustainability. Namely, the only two components that matter are:
- Shareholder equity
- What is the variable cost of their product or service?
- What are the fixed operating costs?
- How much revenue are different products or customers bringing in?
- What sort of investment will be needed for inventory or equipment to grow the business?
Company A: Successful OperationConsider two businesses, Company A and Company B. Company A is an established business operating successfully, with a process that looks like this:
- Revenue is generated
- Variable and fixed costs are paid (inventory, salaries, loan payments, tax payments, etc.)
- The remaining cash is profit that is added to the assets in the balance sheet
- Assets increase, liabilities decrease, shareholder equity grows
Company B: No VisibilityCompany B, however, has no visibility to its costs or specifically where its revenue is coming from:
- Revenue is low or uncertain
- There is not enough money to pay costs
- Costs are cut (product quality suffers, employees are let go)
- Money is taken from the cash account or assets are sold to make up the shortfall
- Assets decrease
- Shareholder equity shrinks