Running a profitable business is a complex challenge, requiring entrepreneurs to be on top of various responsibilities.
One crucial aspect of the business that needs to be carefully monitored and contemplated is its finances. A business’s capital and cash flow is its lifeblood; without it, the enterprise will essentially be on a timer on how long it can stay operational.
With that said, proper financial management is key to withstanding economic and business turmoil and capitalising on opportunities as they arise.
If your capital liquidity is slow-moving, you could struggle to meet financial obligations and pay debt repayments. This can trigger a domino effect where interest accumulates faster than you can pay for it.
As such, it’s important for your business to always have a liquid store of cash within reach. Besides that, being able to shift your business capital without drastically affecting operations is also helpful in improving your financial flexibility.
If you need tips on how to ensure your business is financially flexible, read this article for six tricks on accomplishing just that. Let’s get into it!
1. Prioritise Paying Off Debts
Everyone knows that accumulating large amounts of debt can be disadvantageous to businesses seeking to maintain a high level of liquidity. And for the most part it’s true, acquiring and needing to pay off several running debt obligations restricts capital significantly.
While spacing out payments across a term can help you curb major capital setbacks, it’s also highly restrictive. It prevents you from paying for any sudden expenses or opportunities that may come your way. And in the business world, time ticks quick, and acting sooner rather than later can be the difference maker in getting a good deal or missing it entirely.
Furthermore, debt contracts also come attached with an additional interest rate and late fee. This increases the price of the obligation, which can add up if you fail to allocate enough funds for it once the repayment period rolls around.
As such, a good rule of thumb is to create a strategic and structured debt repayment plan to tackle your debts properly. You can consider accumulating your debt into one and focus on paying for that debt instead of multiple streams. Another alternative is to make advanced debt payments whenever you have the capital to do so.
In clearing off your debts quicker, you can have more of your finances staying within the business. This increases your business’s creditworthiness and net worth while also allowing you to make moves to boost business expansion when the time is right.
2. Build a Liquid Cash Store
Having a cash reserve is another way to stay resilient when times get tough or things start to ramp up.
A cash reserve helps you access available cash without getting into the pockets of other departmental budgets like the operations team. This cash storage essentially serves as a buffer in times of economic uncertainty and unforeseen business outcomes.
Ideally, you should always allocate a small percentage of your business revenue into this reserve. Grow it steadily; a percentage of about three to six months’ worth of operating expenses is often a good goal to aim for.
Consider putting this cash in a high-yield savings account for businesses as well. This ensures that your finances stay safe and also continue to grow even if you’re not using them.
By having a liquid cash reserve, you can continue operating your business without having to worry about using your funds to cover unexpected expenses or opportunities as you’ll have a special fund made specifically for that.
3. Review Your Financial Statements and Metrics
Another way to improve financial flexibility is by evaluating your financial statements and assessing the numbers thoroughly.
Your balance sheet shows your assets and liabilities, helping you know your business’s net worth. It also shows your debt breakdown.
Your income statement looks into your company’s profitability, highlighting income and expenses. Your cash flow statement also tracks cash inflows and outflows by category.
These statements help you assess the performance of your company, thus leading you to make informed decisions on how you want to allocate funds and position your business for growth.
Besides that, you should also look into financial ratios and determine whether your company is performing up to standard. Metrics to assess include debt-to-equity ratio, profit margins, and asset-to-liability ratio.
Furthermore, you can also create more thorough analyses by utilising the numbers and data points found in these ratios and financial statements. Common ways to utilise them include identifying trends, developing financial forecasts, and creating viable contingency plans.
By knowing and analysing these figures, you can make data-driven decisions to do whatever you deem is best for your business—whether it’s to grow and expand it or become more financially flexible in the short term.
4. Leverage Leasing and Lending Options
Another way to stay flexible with your finances is by arranging a leasing agreement instead of outright buying equipment and assets.
To illustrate the point, you don’t have to spend thousands of dollars on a deteriorating vehicle if you don’t intend to use it for the entire duration of its life cycle. This can cost you thousands of dollars more than necessary, especially considering that you also have to pay for maintenance fees.
There are many alternative ways to get access to business equipment without spending a large upfront amount for it.
The most common way is to lease for a specified period. No ownership gets transferred, but the borrower will have the option to extend the contract depending on the stipulated terms.
Another increasingly popular way of leasing in Australia is by entering a novated lease agreement, wherein an employee, employer, and lender enter an agreement to lease a vehicle using pre-tax salary.
This approach is great for businesses that want to remain flexible following the lease term’s end since the contract allows employees to either keep the car, switch to another car or return it back.
Read here to learn more about the pros and cons of a novated lease.
5. Reduce Unnecessary Spending
If you want your business to remain financially agile, you should look into optimising your expenditures and identifying areas that can be trimmed down.
When operating a business, there are a lot of running costs that may have little effect on your operations but could draw money out of your business.
For instance, you could be subscribed to unused software or spending too much on non-essential supplies and inventory. Over time, this could cost your business thousands of dollars.
If your goal is to keep your spending lean, then take some time to oversee these monthly costs and find ways to lower them. Look at cost-effective alternatives or remove them from your operations entirely.
Furthermore, you can also lower the budget per department to reduce overspending. Be sure to communicate this move with relevant parties beforehand.
By controlling your costs, you can free up resources and have more room to take on new initiatives to grow your business or keep yourself afloat during sudden economic downturns.
6. Increase Your Business’s Profit
Another way to improve your financial flexibility is by increasing your profit margins.
Every private company has an underlying goal of making money. And while your business is certainly bound to spend more to reach a higher income ceiling, it’s important to optimise this to ensure that your profitability remains steady throughout.
Be proactive in being profitable. Look into your product offerings and identify ways you can grow your money, whether it’s by introducing complementary services or expanding your product line.
You can also consider creating special loyalty programs to encourage customer retention. Targeting a new demographic to sell to can also bring in new revenue streams.
There are a plethora of ways you can increase your business’s profitability. Test out different scenarios, pick the one that works the best, and iterate accordingly.
We hope these tips will help your business become one step closer to achieving financial success!