2024

Achieving Financial Sustainability: 4 Fundamental Questions for African Healthcare Companies

For many scaling companies, achieving ‘financial sustainability’ stands as a crucial milestone on the path to long-term success. But what exactly does financial sustainability entail, and how can companies achieve it?

At its core, financial sustainability refers to a company’s ability to operate without relying on external sources of capital such as grants, debt, or equity. Instead, sustainable businesses generate sufficient revenue from their operations to cover expenses and weather economic uncertainties without jeopardizing their long-term viability.

For many early-stage companies, achieving financial sustainability can be a daunting challenge. With limited resources and a myriad of competing priorities, understanding the key indicators of sustainability is essential for charting a course toward lasting success. Revenue, profitability, cash flows and working capital are some of the key indicators informing the financial sustainability of a company. Revenue indicates the demand for a company’s product/service, while profitability is the most basic indicator of a business’ performance. A financially sustainable company should either be able to maintain their revenue (where the company is already profitable) or demonstrate growth (creating a pathway to profitability). In either case, the company should be able to meet its operational costs using internally generated cash flows.

Cash flow is the amount of money that flows in and out of your business over a period of time, such as a month, a quarter, or a year. Cash flow is an indicator of your business’s liquidity and solvency, which are the ability to meet your short-term and long-term financial obligations, respectively. Working capital refers to the ability to repay short-term liabilities using short-term assets. A company’s working capital impacts the cash flow. A financially sustainable company will be able to cover all short-term liabilities using short-term assets, and positive cash flows, at least at the operational level.

Companies should consider several key questions to achieve financial sustainability.

#1 – Customer Base: Does the company have an addressable, growing market base or can the company create an addressable customer base?

A fundamental determinant of financial sustainability is a strong value offering to customers.

Prior to launching a product or service, companies should conduct comprehensive market research to identify customer requirements, pain points and gaps, and the steps needed to realize sales. It is essential to gauge the potential for growing demand among customers. Understanding the trajectory of customer demand allows companies to anticipate market shifts and position themselves for sustainable growth.

In cases where a readily addressable market is not available, companies need to explore the possibility of creating addressable market, which involves assessing the process, time, financial constraints, and risks associated with expanding market reach and generating demand. While this may pose challenges, it can also present lucrative opportunities for companies willing to innovate and carve out their niche.

When analyzing the market base, it is crucial to consider not only the presence of a gap but also other customer-associated risks. Factors such as affordability and awareness can significantly impact market penetration, particularly in industries like healthcare. By addressing these risks head-on, companies can enhance their market position and foster sustainable growth.

#2 – Strategic Growth: Is the company able to maintain its market share or grow its share?

A company that is able to grow its market share is more likely to be successful in achieving revenue growth, thereby more effectively move towards financial viability.

To develop a robust growth strategy, management teams should look at strategic growth options available to them, including pros, cons, risks, and financial considerations of each option. Growth initiatives should also be assessed in light of operational bottlenecks e.g., limited workforce, and technology constraints.

Companies must also recognize that not all growth initiatives support financial viability. Often, strategic growth opportunities have a long pathway to profitability, implying that existing activities need to absorb the burden until profitability is achieved. Therefore, it is important that the profitability of new initiatives along with the financing structure for the new initiative be analyzed in detail.

#3 – Capital Structures: What is the right capital structure for the company?

Companies have access to a myriad of capital forms – from grants to equity. Without the appropriate capital structure in place, companies may find themselves grappling with a host of financial strains. These strains can manifest in various forms, such as liquidity shortages, high interest expenses, or inadequate funding for expansion projects. The wrong capital structure can function as a significant impediment to growth and financial sustainability.

Fortunately, companies have access to a diverse array of capital forms, each with its own benefits and drawbacks. For instance, grants provide non-dilutive funding but may come with stringent eligibility criteria. In addition, equity financing offers flexibility but dilutes ownership stakes.

Achieving financial sustainability hinges on finding the optimal blend of capital that aligns with a company’s growth trajectory and risk appetite. This entails assessing factors such as cost of capital, leverage ratios, and funding requirements.

#4 – Operational Processes: Has the company implemented strong processes that minimize leakages and support growth?

Operational processes dictate how tasks are executed, resources are allocated, and risks are managed, all of which directly impact the bottom line. Streamlined processes and optimized workflows minimize waste and inefficiencies, resulting in cost savings and improved profitability. Furthermore, well-defined operational structures enable companies to scale their operations effectively, accommodating growth.

By regularly monitoring key financial metrics, companies can identify potential risks to their sustainability and take proactive steps to mitigate them. Whether it is implementing cost-saving measures, diversifying revenue streams, or optimizing pricing strategies, addressing these challenges head-on can help pave the way for long-term financial health and resilience.

The bottom-line.

While internal factors have a significant impact on financial sustainability, it is also important for companies to remain aware, and look to mitigate/balance out external risks faced by the company. Such risks include the economic conditions a company operates in and the regulatory landscape.

The health of a country’s economy is a critical factor influencing the financial viability of individual companies. A buoyant economy can propel a company to new heights, while a stagnant or declining economy can spell trouble for even the most robust businesses.

A robust economy characterized by steady growth and stability is likely to attract greater investor confidence, fostering a favorable investment climate for companies seeking capital to fuel their growth ambitions. Conversely, in an economic downturn characterized by sluggish GDP growth or recessionary conditions, companies may face significant headwinds.

By understanding and monitoring key economic indicators, companies can better assess their operating environment, anticipate potential challenges, and position themselves for success in an ever-evolving global marketplace. For example, companies operating in unstable economic conditions can look to diversify its presence through country expansion and partnerships in more stable countries.

In the complex landscape of business operations, compliance with laws and regulations stands as a fundamental pillar. When it comes to regulatory compliance, it is crucial to understand that different companies are subject to various sets of rules. These regulations are often enforced by different regulatory bodies, each with its own mandates and enforcement mechanisms. Consequently, navigating the regulatory landscape can be challenging, with requirements varying in complexity and stringency.

For companies, particularly early-stage ones, grappling with regulatory compliance can be daunting. Limited resources and workforce may pose significant obstacles, making it difficult to meet all the necessary obligations. Therefore, it is imperative for companies to assess their financial capabilities and allocate resources strategically to ensure compliance without unduly straining their operations.

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News - 06/26/2024

Top Health Finance Takeaways from the 77th World Health Assembly

Late last month, government delegations, implementing partners, innovators, investors, and other stakeholders from around the world convened for the 77th World Health Assembly in Geneva, Switzerland, to address this year’s theme: All for Health, Health for All.

News - 06/11/2024

Analyst, Health Finance Coalition

The Health Finance Coalition is seeking to hire an Analyst who will play a significant role providing program, administrative, and operational support for the HFC team.

Jobs - 05/03/2024

Investing In Our Future: A Conversation with Paul Watkiss, Lead Author on the UNEP Gap Report’s “Adaptation Finance Gap”

According to a new United Nations report, developing countries need far more finance to adapt to climate change. In an interview with the Health Finance Coalition, Paul Watkiss, one of the lead authors of the UNEP Adaptation Gap Report’s finance section, discusses the widening adaptation finance gap, its impacts on health and what is needed to reduce the growing divide.

What is ‘Adaptation Finance Gap’?

WATKISS: The overall Adaptation Gap report looks at the progress on adaptation. However, it’s challenging to do this because progress on adaptation is more difficult to determine than for mitigation.

For mitigation, we have a quantified target, for example to achieve net zero target. For adaptation there is no equivalent target, so we look at areas of progress, around adaptation implementation, policies, and finance.

For finance, we look at the size of the adaptation finance gap. We estimate what the cost of adaptation is likely to be for developing countries, which gives us our potential finance needs. We then look at the current adaptation finance flows, which tells us how close we are to meeting those needs. The difference between the two gives us the adaptation finance.

What were your findings?

WATKISS: We focus on the adaptation finance gap this decade. For developing countries, we estimated that adaptation costs – that’s how much we think we need – could be around $215 to $387 billion a year. We then compared that to current finance flows, which in 2021were around $21 billion a year.

So, we need approximately 200 to 400 billion and we’ve got around 20 billion from international public sources. Th difference between those two numbers is the adaptation finance gap, and it’s large, at least a couple of hundred billion dollars a year.

Why is that gap growing?

WATKISS: We look at several evidence lines for our analysis. We estimate the cost of adaptation, using models, and that gives us one evidence line. We also look at the submissions from countries in their Nationally Determined Contributions (NDCs) National Adaptation Plans (NAPs) as a different evidence line. In both cases, what we find is the estimated costs are increasing.

If you look at the most recent IPCC reports, the literature is much more negative and projects larger impacts of climate change happening sooner, so the science is one factor driving the increase in adaptation costs.

At the same time, developing countries are recognizing that they need to widen adaptation to more sectors than they had thought about previously, and that they are going to have to adapt to larger extreme events. So, they will need more resources and their estimates of adaptation needs are increasing.

On the finance flows, the levels of adaptation finance from international public sources is broadly constant. So, while costs are going up, finance appears and therefore, the gap is getting bigger.

Does this alarm you?

WATKISS: The numbers have gone up since the last time we looked in detail, which was in 2016, so yes, that’s a source of concern. The other thing is, if you’re not financing adaptation, then you’re going to end up with higher levels of loss and damage.

On the other hand, while this sounds like a large finance gap, it is not impossible to address. For example, in 2020, total official development assistance – the flows of support from developed to developing countries – was $200 billion. If developed countries all met the target to provide 0.7% of their GDP to ODA, this would close the gap on its own.

And even if we don’t fill the entire gap, increasing adaptation finance will significantly reduce the impacts of climate change, as the economic benefits of adaptation far outweigh the costs.

Given this widening finance gap, do you have concerns specific to Health?

WATKISS: In the same way that we can look at for adaptation finance gap for all sectors, we can also shine a light on the health sector. We find the same messages: estimates of adaptation costs are increasing, and current finance flows are too low.

We’ve also seen countries diving into more detail in the health sector to look at their adaptation finance needs, using health NAPs (health National Adaptation Plans) so that they are building a better idea about what they might need for the sector.

For the health sector, we estimate that health adaptation costs this decade could be around $10 billion a year. This can be compared to health adaptation finance flows, which are only around $1billion a year. And so there’s a growing health adaptation finance gap.

Do you have concerns when it comes to disease control, such as malaria?

WATKISS: There are several climate sensitive diseases that climate change has the potential to increase, including malaria.

And of course, that means that we’re going to implicitly need some additional finance – compared to the baseline for malaria – in a changing world of climate change.

What needs to be done to address this widening finance gap?

I think it’s also important to highlight that there’s no magic bullet or silver bullet here to fill the gap and it’s a mix of things that need to happen. Obviously, the starting point is that the amount of finance from international public finance sources needs to increase. We need to make sure we hit the goal of doubling adaptation finance by 2025. That’s a really important foundational layer for everything else.

Also, countries can provide and scale up their own domestic finance for adaptation. And many of them are already doing that.

But at the same time, there are issues if the least developed countries must do this, because of issues of equity. These countries have extremely low GHG emissions, and they have not caused climate problems. If a developing country has to spend its own domestic on adaptation, then it’s taking away resources that should be spent on development, and that is inequitable.

Another big finance source could be the private sector.

We can incentivize the private sector to invest by using public finance to buy down the risks of investment, or to support innovation.

However, it is important to stress that the private sector will invest in its own self self-interest, or where there are opportunities, so it will only be interested in certain types of adaptation financing. where there’s an economic return. So the private sector is unlikely to finance the most vulnerable communities or areas that would traditionally be financed by the private sector.

Should early warning systems be part of the solution?

WATKISS: In the Gap report, we do look at the opportunities for early warning systems. These are what we would call a ‘no regret adaptation option’ – the sort of things we should be doing anyway. These offer really good early returns on investment, and have high benefits compared to the costs.

However, to maximize the economic benefits of early warning system investments, you must use a value chain perspective, to make sure that as well as providing accurate and timely information, that this reaches users, and that they use the information to make better decisions. This means you must invest across the value chain.

On their own, early warning systems ae not going to address all the problems of climate change, but they are definitely a really important part of the portfolio and need to be scaled up.

**Paul Watkiss is an independent researcher with over 20 years’ experience of multi-disciplinary research in climate change and adaptation policy.**

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News - 04/17/2024

Global Equity Webinar: A Discussion on the Role of Businesses in Improving Healthcare for Women & Children

Today, millions of women, children and adolescents do not have access to the healthcare they need, particularly in low- and middle-income countries: every two minutes, a woman dies from complications in pregnancy and childbirth. Government health budgets face a $33 billion funding gap to address this. The private sector is a crucial partner in increasing access to services and securing greater financial investment.

News / Stories - 03/27/2024

Achieving Financial Sustainability: 4 Fundamental Questions for African Healthcare Companies

Top Health Finance Takeaways from the 77th World Health Assembly

Analyst, Health Finance Coalition

Investing In Our Future: A Conversation with Paul Watkiss, Lead Author on the UNEP Gap Report’s “Adaptation Finance Gap”

Global Equity Webinar: A Discussion on the Role of Businesses in Improving Healthcare for Women & Children

Interested in learning more?