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3 Key Steps to Financial Flexibility and Business Agility

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Despite the pandemic’s sweeping economic impact, companies that were quick to adapt to the “new normal” came out better than before. Resilient, successful companies know how and when to jump at unexpected chances.

That’s why adopting an agile organizational mindset that enables business agility and flexibility is key to capitalizing on opportunities in an ever-evolving business environment.

Simply put, you never know when an opportunity will arise (or when your options are bleak and you need to create one), so your organization has to be ready to move swiftly and efficiently. Ultimately, the agility needed to capitalize on new possibilities requires financial flexibility.

What does financial flexibility look like?

For most organizations, the first step to financial flexibility is building up cash reserves in order to fund new projects and developments. If you don’t have liquidity when you need it, you can’t deploy capital to benefit from unexpected opportunities. Some organizations may choose to borrow money at low rates to ensure financial flexibility, while others may simply choose to bootstrap and self-fund initiatives.

Whether relying on cash reserves or borrowed funds, maintaining adequate financial flexibility requires careful planning. For example, building a financial model to track not just profits and losses, but also a balance sheet and cash flow statement, is the best way to regularly keep track of your organization’s financial performance.

At the same time, it’s equally important to prioritize projects in accordance with your organization’s larger financial goals. Identifying which opportunities to seize on—and which you might say “no” to at present—helps put you on the path toward meeting both immediate and long-term goals.

Let’s take a look at the three most important steps to achieving organizational financial flexibility: building cash reserves, having a forward-looking model to monitor your targets, and prioritizing projects and expenses.

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1. Build cash reserves by setting targets

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Target-setting is a crucial consideration for building up your company’s cash reserves. You can start with monthly goals. Just as you would budget for expenses, set aside a specific amount of incoming revenue for your cash reserves and factor that into your larger financial plan.

How much you can allocate to your reserve depends on a few items. Ultimately, you need to track your cash flow, which includes tracking revenue and expenses to determine if you can generate enough surplus. You also need to consider the balance sheet with any capital expenditures, major investments, or debt pay downs. Lastly, you need to ensure you are staying aligned with your industry’s and company’s key metrics.

Consider Hart Telephone Company (HTC) — a small, rural telecommunications company based in Hartwell, Georgia. Though HTC receives government funding, they are a for-profit business. As a result, they are tasked with providing innovative services to their customers while working with fewer resources than their urban counterparts.

By building a financial-statement-focused model, HTC has been able to more accurately project cash flows and build cash reserves accordingly. “We sit down every October with stakeholders to plan out our capital build for next year,” said CFO Melissa Green, “including what types of services we’re going to be offering to our customers, and it’s only because we have the cash flow statement in Synario that I am able to do that.”

What’s more, HTC now “know[s] what the current state of our financials are, as well as where we’re going to be five years from now.” Whenever more cash is needed, Synario makes it easy for HTC to evaluate loan covenants and ensure that the company is on track to meet them.

2. Ensure business agility with a forward-looking financial model

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As Green explained, adaptable financial planning is key to understanding your company’s present and future financial health. This understanding will allow any organization to build the cash reserves necessary for future financial flexibility.

But a forward-looking financial plan also provides key insights into your company’s long-term financial standing. This, in turn, positions your company to plan for—and act upon—any new opportunities that arise.

Take MEC, for instance. Midwest Energy and Communications (MEC) provides electric distribution, fiber broadband, and propane distribution services to rural southwest and southeast Michigan, as well as parts of northern Indiana and Ohio.

In 2014, MEC decided to construct a $60 million fiber broadband network that would provide high-speed internet service to 30,000 customers in its Southwest region. Four years later, MEC’s Board of Directors met to assess the feasibility of extending this network to an additional 6,000 members in its Southeast region—an additional cost of $20 million.

The company’s forward-looking financial modeling allowed CFO Todd Crandall and his team to evaluate the feasibility of the expansion and answer key questions, like “What’s it going to do to the organization as a whole? What will it do to loan covenants? How, and who, will finance it?”

By performing both micro and macro scenario analysis, as well as forecasting sales based on kilowatt-hours of usage, this process gave Crandall and his team deeper, more dependable insights into how MEC as a whole might be impacted by new projects, particularly important given the capital-intensive nature of MEC’s core business.

Better financial insights allowed MEC to assess the long-term feasibility of its $20 million expansion project. Once Crandall and team were confident in their forecasts, MEC decided to move forward with the expansion, which has since proved a success.

3. Prioritize projects and expenses appropriately

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Having the confidence to move forward with new business opportunities relies on a robust, forward-looking financial model—a “single source of truth” for your company’s financials and core of all strategic deliberation.

Most businesses have competing priorities and lots of ideas for how to capitalize on different market opportunities. It takes discipline to evaluate the financial expectations for these initiatives prior to moving forward. It also can be overwhelming when you have a lot of ideas but only limited resources. Which ones do you tackle? Should you just do all of them?

In these cases, your organization must keep its long-term goals—its “guiding north star”—top of mind. Which projects and opportunities can you say yes to? Which would be best left on the table for future consideration?

These questions were recently at the forefront of the Illinois Institute of Technology’s financial plans.

Several years ago, IIT established a new 5-year strategic plan that would ensure its long-term financial health. In 2018, Mike Horan (former VP for Finance, CFO, & Treasurer at IIT), Mary Ellen Borchers (Former Associate VP for Finance at IIT), and team took to their financial model and started establishing their KPIs for financial health. Their first focus was operational sustainability, or making sure IIT’s revenues and expenses would support the school’s strategic plan. They asked themselves whether their current revenue—86% of which came from students—was sustainable.

Their next KPI was balance sheet durability. To IIT’s team, financial flexibility meant being able to withstand black swan events like the pandemic. The organization’s balance sheet had to be resilient enough to persevere through any prodigious event. This would put them in a position to capitalize on future opportunities—or, as Horan said, to “pivot to new options” in the face of the unexpected.

Comparing the strategic plan to their base case, Horan’s team assessed how even the slightest changes to opportunities could impact their KPIs. This allowed the Illinois Institute of Technology to identify the most feasible, low-risk plan and prioritize accordingly.

Be intentional about financial flexibility

Financial flexibility is not an on/off switch. It doesn’t happen overnight, and it won’t happen at all without plenty of preparation and strategic planning. Rather, true financial flexibility and business agility require careful planning and coordination.

Synario helps companies create adaptable, forward-looking financial models that take the guesswork out of contingency planning and increased reserves. That’s why companies like HTC, MEC, and IIT all use Synario to plan for future projects, assess their financial viability, and ensure their organization’s long-term financial success and resilience.

See how Synario can improve your business agility and help create a more financially flexible organization.