What is financial flexibility in finance?

1 Financial flexibility represents the ability of a firm to access and restructure its financing at a low cost. Financially flexible firms are able to avoid financial distress in the face of negative shocks, and to readily fund investment when profitable opportunities arise.

Does debt provide financial flexibility?

For businesses, debt is one of two common ways to raise money for growth and development. The other is to take on equity investment from shareholders. Compared to investments, debt financing offers some flexibility but also presents some restrictions.

How is financial flexibility important for the company?

Financial flexibility gives a business the ability to adapt, pivot, and evolve with relative ease. There’s far less friction involved in the process, and you’re able to do more with less. Less volatility. But when a firm is financially flexible, there’s far less volatility.

What does financial strength mean?

At its most basic level, financial strength is the ability to generate profits and sufficient cash flow to pay bills and repay debt or investors. Most business owners are focused on generating sales to increase profitability, however, sales alone do not build financial strength.

What is financial structure of a company?

Financial structure refers to the mix of debt and equity that a company uses to finance its operations. This composition directly affects the risk and value of the associated business. In general, the financial structure of a company can also be referred to as the capital structure.

Why is financial flexibility important in the choice of a capital structure?

Financial flexibility can explain why companies do not have a capital structure and debt that traditionally could expect from a leverage effect. … Firms should achieve financial flexibility to keep valuable options to handle future contingencies to provide safe and reliable stores of value.

What are the key components of financial strength?

According to the Financial Literacy and Education Commission, there are five key components of financial literacy: earn, spend, save and invest, borrow, and protect.

What are the problems and solutions of financial flexibility?

Financial Flexibility – Problems and Solution. A firm’s financial flexibility is its ability to quickly raise new funds to meet a major fund need created by a crisis. Flexibility aspects of the capital structure decision are very similar to risk problems and are analyzed in the same way.

What does it mean to be financially flexible?

Every CFO and finance guru will have his or her own opinion on what it means to be financially flexible, but it’s ultimately a company’s ability to quickly access new funds to satisfy major business needs that arise suddenly as the result of an opportunity or crisis.

What are the benefits of flexibility in business?

When you have flexibility, you don’t have to mortgage the future away. Better focus. Think about how much time and energy goes toward figuring out the best way to finance a major business decision. For firms with a high degree of financial flexibility, less energy has to be given to this part of the decision.

What should be the alternative to financial flexibility?

The alternative is to raise equity in some manner or to trim the investment project, perhaps stretching it out for several years. KEY POINT: Financial Flexibility aspects of a capital-structure decision are not easy ones to evaluate. The factors that must be considered vary substantially from case to case.