When exploring the concept of stability, one can come across the phrase “The term ‘sustainability’ is so expressive that it speaks for itself”.
The Encyclopedic Dictionary of Mathematics states: “Sustainability is a term that does not have a clearly defined content…” Both quotes are borrowed from mathematicians.
In physics, for example, terms like “stability of movement”, “stable equilibrium”, “thermodynamic stability”, “stability of elastic systems”, etc., exist.
In many sciences, the concept of stability is fundamental.
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There are many approaches to what is considered sustainable, but most often, sustainability is understood as the ability of the system to adequately respond to changes in external conditions.
The concept of stability has several meanings, but each of them refers to the general interpretation of the term:
- In mechanics, stability is characterized by the response to a slight perturbation of a system in mechanical equilibrium. There are asymptotic stability, stability according to Lyapunov, exponential stability, asymptotic stability in general, etc.
- In probability theory, statistical stability is determined by accuracy as the convergence of the frequencies of the values of the results of measuring the physical value.
- In the theory of automatic control, stability is characterized by the reaction of the dynamic system to external influences.
- In numerical analysis, stability shows how at the same time, the algorithm is associated with errors in the calculations.
- In everyday conversations about computers, sustainability is the tendency of a system or program to crash.
- In meteorology, air stability refers to vertical movement of air currents.
- In sociology, there is also the term social stability.
- In environmental science, the concept of “sustainability of the population” is its ability to be in a state of dynamic equilibrium with the environment: environmental conditions change – adequately change there is also a population. Conditions return to their initial value, the population also restores its properties. The stability is believed to be the ability to maintain its properties, despite external changes.
- In economics, sustainability is interpreted as the ability of economic systems to maintain their quality under conditions of changing environment and internal transformations.
The study of the manifestation of the essence of sustainability in complex systems, including the economic sustainability of an enterprise, showed the absence to date of a single generally accepted opinion on the definition of this category.
Economic Sustainability
For the first time, the term “economic sustainability” arose in connection with the consideration of the problem of limited resources, which has become a consequence of the global energy crises of 1973 and 1979.
During its existence, this direction of economic thought evolved into a separate discipline, which is called “ecosestate” (ekosestate) “economic security of state”.
It means the economic stability of the state. The latter can be achieved with the economic stability of its structural elements (territory, industries, enterprises).
Economic sustainability can also be specified as how to ensure its cost-effective production and commercial activities by improving the efficiency of the use of water resources and enterprise management, sustainable financial condition by improving the structure of assets, as well as stable development of enterprise power and social development team with self-financing in a dynamically developing growing external environment.
In modern economic literature, along with the concept of economic sustainability, organizational and economic and financial and economic sustainability appear.
In general, the concept of economic sustainability of an organization can be formulated as follows: equilibrium balanced state economic resources, which provides a stable profitness and normal conditions for expanded reproduction unsustainable economic growth in the long term, taking into account the most important external and internal factors.
Financial Sustainability
Financial sustainability is the state of an enterprise’s account goods that guarantee its solvency. However, any significant economic transaction can either improve or worsen an enterprise’s financial condition.
The flow of daily business operations disturbs the defined state of financial stability, causing the transition from one type of stability to another.
The concept of financial sustainability of an organization is broader than the concepts of solvency and creditworthiness because it includes an assessment of various aspects of the organization’s activities.
Domestic economists interpret the essence of the concept of financial stability. In the early 90s, the margin of financial stability of enterprises was characterized by a stock of sources of own funds provided that their own funds exceeded borrowed funds.
Financial stability was also estimated by the ratio of own and borrowed funds in active enterprise, the rate of accumulation of own funds, the ratio of long-term and short-term obligations, and sufficient collateral use of material working capital from own sources.
The financial stability of an enterprise reflects the standing of financial resources, in which the enterprise can freely maneuver money and use it effectively to ensure an uninterrupted production process and sales of products, as well as the costs of its expansion and updating.
Determining the boundaries of financial stability is one of the most important economic problems because insufficient financial stability can lead to non-payment ability of enterprises and their lack of funds for production development, while excess will impede development, burdening costs to enterprises due to excess stocks and reserves.
Therefore, financial stability should be characterized by the state of financial resources that meets market requirements and meets the development needs of the enterprise.
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Solvency
Solvency is a crucial element of sound financial management. As a result of its operations based on efficient formation, distribution, and use of financial resources, we can say that financial stability guarantees the solvency and creditworthiness of the enterprise.
Financial stability also includes the availability of reserves with their own sources of formation and the proportion of own and borrowed funds sources covering the company’s assets.
The definition of “solvency” is not clear-cut. According to foreign economic literature, the primary goal of a liquidity analysis is to determine an organization’s solvency. In addition to absolute or short-term solvency, solvency also includes long-term solvency.
The solvency of an enterprise in a specific period of time is a necessary condition, but not sufficient. The sufficiency condition is met when the enterprise is solvent in time, that is, it has a stable payment ability to meet its debts at any time.
However, an enterprise can pay off previous debts at the expense of new debts, such as loans, without finding a point of financial balance between own and borrowed funds.
The enterprise can actively use the effect of financial leverage, although it will remain insolvent, and the structure of the balance unsatisfactory.
Creditworthiness assessment allows predicting prospective solvency, and its analysis is closely related to the analysis of solvency, financial stability, and profitability of capital.
To assess the efficiency of capital use, three main indicators of profitability are used:
- Overall return on invested capital,
- The rate of return on borrowed capital invested by creditors, and
- The rate of return (profitability) of own capital.
