When business people and management scholars speak of sustainability, they most often refer to the idea of a triple bottom line for planet, people and profit – sustainability as the integration of ecological, social and economic goals or dimensions. The focus of research, just as the activities of “sustainability managers”, is on calculating and evaluating ecological and social sustainability. Carbon footprinting, lifecycle analysis, employee motivation and human capital as an asset – these topics are often driving sustainability debates in companies. Economic sustainability is somehow taken for granted: first, a company needs to have it in order to fulfill the other sustainability goals, and second, we all know what it is. Is that so?
There has been some research on the first assumption, that economic sustainability comes first. Especially Dyllick and Hockerts provided valuable arguments that there is some benefit waiting when economic sustainability is not seen as a prerequisite, but as a result from focusing on the “natural case” or “societal case” for sustainability – to start thinking how a company can solve ecological and societal problems with its competences, thus arriving at a new profitable business case. My attention is on the second assumption, that we all know what is meant by “economic sustainability”.
Common sense would probably answer that question with something like “the long-term viability of a company”. To be able to pay all the bills today and tomorrow and have some perspectives for further developments like new products and new markets. “Paying all the bills” can be calculated. In fact that is the origin of the idea of a bottom line: substract everything that is going out of the company money-wise from everything that is coming in money-wise. But as first semester students in business administration are taught, this is not always that simple. It starts with the different perspectives on “what is going out” and how to calculate for costs. In fact the definition of costs is quite vague: the monetized efforts for keeping up business operations in order to fulfill company goals. (I am oversimplifying a bit) On the other hand, “all that is coming in” translates into monetized revenues from the results of business operations, namely the sale of products. You can also view revenues as the monetized valuation from customers for the company’s activities in fulfilling their needs. When revenues match or exceed costs, you can argue that economic sustainability might be achieved. If costs exceed revenues, you are probably entering difficult times.
However the definitions entail very fuzzy concepts. Depending on how company efforts and customer valuations are monetized, the calculation changes. Likewise if business operations, company goals or customer needs undergo change. Economic sustainability, just like all other perspectives on sustainability, is not a static notion. You cannot say anything meaningful about the economic sustainability of a company by looking at its current balance sheet.
Lets stick to financial numbers for a second. Probably the key measure here is liquidity. Liquidity is the ability of a company to pay for all liabilities at any time. Following German sociologist Niklas Luhmann, liquidity is in fact the dominant code or rationale in the economy. And companies use this economic rationale of liquidity as their primary reference against which all decisions are checked. Think about investments. These are evaluated to their extent of enhancing a company’s ability to ensure future liquidity. The investment with the highest potential for doing so will be chosen. Several liquidity measures can be calculated, like cash ratio, quick ratio, current ratio or operating cash flow ratio. All are focused on current assets or income to current liabilities. None of these measures will tell you what is going to happen in the future. You could argue that there is some form of short-term or “current” economic sustainability. But somehow this would contradict the very idea behind the concept. The problem might be a different one however. Financial aspects are not a good measure for a company’s economic sustainability in the first place. The conflation of “economic” with “financial” is narrowing the view too much on the present, on efforts and returns in monetized form.
This is not unnecessary for the concept of economic sustainability but it is by no means sufficient. Company goals, its core products, its customer base, customer needs and values are not a part of finance. They are a part of strategy. Of the mission you feel obliged to follow. It is about the very essence why a company exists in the first place. Your current financial data does not tell you what you should do nor what your business is about. They, at best, give you an idea what you can do under present circumstances and if nothing else changes. If ceteris remains paribus. In the real world that rarely is the case. Finance does not absolve management from strategic thinking and reasoning, nor from creating new business cases, maybe from focusing on ecological and societal problems and how to contribute as a business in solving them. Economic sustainability is a strategic issue. It involves thinking about long-term viability of a company through taking ecological and social sustainability into the focus of strategic reasoning and new business development.