Economic viability is the study that analyses whether a project has the capacity to generate sufficient returns to cover its costs and produce profit over time. It is based on projected figures rather than certainties, and seeks to determine whether an investment creates value for the business.
This analysis takes into account initial investments, recurring expenditure, expected revenues, and the time value of money. It also evaluates how these elements behave under different scenarios, since variations in costs, prices, or sales volumes can directly affect outcomes.
Beyond indicating whether a project can generate profit, an economic viability analysis makes it possible to assess whether the expected return justifies the resources invested and the risks assumed. A project may show positive results in projections and yet remain insufficiently attractive when compared with alternative investment options.
Economic Viability vs Financial Viability: What Is the Difference?
Economic viability evaluates a project’s capacity to generate value and returns over the period under analysis. The focus is on the relationship between the expected economic benefits and the resources required to carry out the investment, taking into account factors such as costs, revenues, risk, and the cost of capital.
This analysis seeks to answer whether the project makes sense as an investment. Even when returns take time to materialise, the economic assessment allows one to verify whether the expected benefits justify the resources mobilised and the associated risks.
Financial viability, by contrast, is concerned with the project’s ability to generate sufficient cash flows to meet its financial obligations. It examines whether there will be adequate liquidity to cover expenditures such as wages, supplier payments, taxes, and financing costs — particularly during the implementation phase and until revenues begin to flow regularly.
This aspect is especially important for small and medium-sized enterprises (SMEs), as a project may be economically viable yet require financial resources that the company is unable to mobilise or sustain during the period leading up to revenue generation.
A project can therefore be economically viable while simultaneously facing financial viability challenges. In such cases, the problem does not necessarily lie in the expected return, but in the capacity to finance the period before those returns are realised. For this reason, both analyses should be conducted together in order to provide a more complete assessment of a project’s sustainability.
Source: Serasa Experian
Source: Diário Económico
Original article: https://www.diarioeconomico.co.mz/?p=547173
