Financial Flexibility for Small Businesses

If there is one quality that is shared by every successful business it’s the ability to respond quickly and effectively to sudden changes in a company’s fortunes. Crises and opportunities present themselves in equal measure and business owners should strive to be in a position to ride out the former while taking advantage of the latter. 

That may seem like a tall order, and in some respects it is. But when you’re running an independent business change is the one constant you can always count on, and in order to achieve long-term success companies need to be able to pivot and parry as circumstances demand. In short, businesses need to be financially flexible to be truly successful. 

What Do We Mean by Financial Flexibility? 

The definition of financial flexibility for businesses would likely vary depending upon whom you talked to. The CFO of a Fortune 500 company may well define it differently than a boots-on-the-ground advisor from the Small Business Administration. But at its most basic, financial flexibility is the ability to access the funds you need to effectively respond to sudden financial pressures or unexpected business opportunities. 

But that flexibility is about more than simply building up hefty cash reserves. While it’s clearly important to have adequate funds available to cover payroll, inventory and normal operating costs, it’s also important to be able to access much needed cash when faced with either a financial pitfall or a potentially lucrative business offer. In short, financial flexibility means you can do what you want, when you want, without having to mortgage the homestead. 

The Benefits of a Financially Flexible Business Model 

Financial flexibility benefits small businesses in a number of key areas, and it should be the goal of every business owner regardless of the size of their enterprise. Some of the most obvious benefits of establishing financial flexibility for your business include: 

• Quicker and More Assured Decision Making – When a business is financially flexible it’s easier for management to make quick and assured decisions when response times are critical. This can often can mean the difference between outpacing your competitors and falling behind in the race.
• Increased Growth and Sustainability – Too many small businesses forfeit their future growth because they are unable to seize opportunities when they present themselves. Financial flexibility provides the wherewithal business owners need to take advantage of potential rewarding opportunities so their business can continue to thrive and grow.
• Improved Adaptability – Adaptability is key to any successful enterprise. The marketplace is always changing and small businesses need to be able to respond to those changes in a quick and effective manner. The more flexible your business the more capable you are of adapting.
• Decreased Volatility – When money is tight and valuable assets are seemingly out of reach business owners can get locked into permanent reaction mode. You become unable to plan for the future because you’re too busy wrestling with current financial problems. Improved financial flexibility means that operations become less volatile and business plans can be made in a calm and proactive manner.

4 Steps to Achieving Financial Flexibility 

If financial flexibility is your goal (and it should be) the question then becomes how do you achieve it? Unfortunately, there is no short answer to that question. Financial flexibility requires a concerted effort on the part of business owners, and there are a number of different steps that, when taken together, can help your reach your goal. 

1. Manage Profits More Carefully – Profitability is the aim of every business. Without a healthy bottom line there is nowhere to go but down. However, it is important for smaller companies to resist the urge to turn profits into cash bonuses and salary increases. Naturally, you want to spread the wealth a bit and reward your employees’ hard work. But too much too soon can deplete the business coffers and that can spell trouble down the line.
   Take care to manage profits responsibly, and set aside a good portion to reinvest in your business. There are many reasons to reinvest in your own company, and laying the foundations for greater financial flexibility is close to the top of that list. Use your profits wisely, taking care to pay down debt while building a cash emergency fund. Once the priorities of reinvestment and expenses are taken care of, then you can make better decisions about end of year bonuses and salary increases.

2. Build a Better Budget – The flipside of profits is budgeting. Every business needs a detailed budget that clearly shows where the money is going. The goal here is to reduce expenses, maximize the use of incoming revenue, and better position your business to afford the investments that are needed to support sustained growth.
   The key with any budget is to follow it as strictly as possible. Avoid allowing seemingly marginal expenses to get tacked on to your budget for the sake of convenience. It doesn’t take much to blow up an otherwise sound budget. A few extra allowances here and there and before you know it your expenses have started to severely cut into your profits.

3. Utilize Strategic Financing – Financial flexibility isn’t about amassing an unrealistic stash of ready cash. Rather, it’s about being able to tap into funding when it’s needed. A big part of that is using strategic financing whenever possible.
   Business owners naturally want to control their debt levels, but some debt can work for you rather than against you. For example, a business line of credit can help increase the company cash flow while giving you access to much needed funds in times of crisis or opportunity. Used wisely, credit can also help to boost your overall credit score. This can ultimately open up further financing options down the road in the event you want to expand the business or cover an unexpected large expense.

4. Diversify Your Revenue Streams – So far we’ve concentrated on managing your business’ profits and debts as a way to improve your overall financial flexibility. But there is one last area that demands attention. Namely, where your profits are coming from.
   Businesses with a single revenue stream are particularly vulnerable in times of trouble. If that revenue stream dries up for any reason you’ll have to rely on cash reserves and credit to maintain operations. That can quickly cripple any business.
   Look for ways to increase your customer demographic and diversify your revenue streams. This will give you the means to weather any potential financial hardships while still providing the flexibility you need to pivot in times of trouble without losing too much market momentum.

Flexibility Delivers a Sound Foundation 

The future growth and sustainability of your business largely depends on the financial decisions you make today. As we all know the business world can be extremely volatile, but working towards keeping your company financially flexible will help to insulate your business from any potential fiscal emergencies. It will also help to position your business for better growth over the long term, making it easier for you to take advantage of opportunities that other companies may be forced to pass up due to their own inflexibility. 

Don’t let the future pass you by. Take steps now to achieve financial flexibility for your business. Remember, the decisions you make today lay the groundwork for tomorrow’s success.