How to navigate an unpredictable marketplace
In the post-pandemic world, many businesses have been forced to change the way that they operate in order to remain resilient and viable in an unpredictable marketplace. In view of this reality, it’s perhaps never been more important for businesses to examine their levels of financial flexibility. So what exactly does it mean to be financially flexible and what makes this business element so crucial in the current marketplace? We examine the details here for students taking an MBA program.
Being financially flexible generally refers to a business’s ability to quickly access funds to respond to unanticipated or emergent situations. Such a situation may come in the form of a major crisis, leading to unexpected major business expenditure. Those taking business courses will no doubt quickly think of the pandemic as the perfect example, causing many companies to scramble to find the cash to cover the cost of economic losses, or to quickly re-structure. An unforeseeable situation within the context of financial flexibility might also be represented by a sudden unexpected opportunity that a business might choose to quickly seize upon to gain a market advantage. In these cases, the business takes on the risk of borrowing or using some of its available funds to funnel towards an investment opportunity deemed too good to pass up. In either scenario, the ability to borrow or use this quick and usually large amount of funding without otherwise impacting the business’s normal operations and overall financial health is a reflection of a business’s superior financial flexibility.
Being financially flexible gives a business the luxury of being able to withstand the internal budgetary pressures that might arise from unexpected situations, without impacting its bottom line. Businesses with a solid level of financial flexibility can tough out the worst of economic setbacks, such as the one caused across the globe by the pandemic.
Well developed, cash-rich companies with larger coffers and the level of structuring to plan long-term will often have something of a “war chest” reserve of funds in place to endure unexpected financial hardships. They will also typically have the capacity to quickly borrow funds in preparation for such an event, thus able to survive the long-term impact of economic disruptions. In many cases, it’s the explanation for how those businesses have managed to power through a situation that so many others couldn’t. Many smaller and less established businesses simply don’t have the level of funds or the risk assessment seal of approval of lenders to be able to call themselves financially flexible, and will therefore not have the capacity to survive longer-lasting economic downturns.
Those taking an MBA program may be interested in understanding how a business’s financial flexibility can be assessed. Financial analysts and investors will generally take an approach of examining the operation’s cash holdings and leverage based on some key ratios. The business’s leverage is based on its debt ratio, which can be measured by looking at its total liabilities against total assets. The debt to equity ratio, meanwhile, assesses the company’s total liabilities against its owner equity. Lenders will generally make a risk assessment based on these ratios, and are less likely to lend to businesses with higher, unfavorable ratios. This results in the business in question being less financially flexible.
Understanding the importance of financial flexibility is key to any business’s success. It takes time and strategies to achieve the designation through such behaviors such as diversifying revenue streams, using lower-interest business lines of credit, planning budgets carefully, and spending profits judiciously. Taking the time to research the most effective strategies for achieving greater flexibility will place a business at an advantage in a current global marketplace that remains unpredictable at best.
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