Nothing has highlighted the need for financial flexibility more than the volatility of the business world for the past year and a half. During the Covid-19 pandemic, business owners in every industry learned about adapting quickly to unexpected scenarios.
Creating a financially-flexible business gives you confidence that you'll be able to pivot as markets change. The following are four ways you can start building that flexibility in your own business:
1. Diversify your sources of revenue.
You shouldn't be reliant on one source of revenue. Often a young business will start with just one product and target just one market or demographic. If that's the position you're in, it's time to make a plan to diversify and set goals for growth.
Diversifying your sources of revenue can happen in a number of ways. You can enter new markets, ensuring that a complication in one market won't disrupt your entire business. You can also expand your product offerings. If one product fails, your entire business won't be at risk.
The greater diversity you can add to your income, the better.
2. Increase efficiency and organization.
I recently discussed financial flexibility with Didi Gurfunkel, co-founder and CEO of DataRails. He explained how his company has been able to achieve major growth -- to the tune of $1.4 million in annual revenue, according to Nathan Latka's estimates. DataRails allows CFOs and financial data professionals a way to improve the organization of financial statements and other important information at their companies.
DataRails opens up possibilities for its customers by simplifying the process for tracking sources of income, expenses, financial risk, and future financial projections. Gurfunkel explained how this knowledge allows for greater financial flexibility because it gives companies confidence in their numbers. When you're able to perform on-demand analyses of your business's financial standing and potential opportunities as they arise, you'll increase your company's resiliency and agility.
Gurfunkel's platform increases efficiency and organization. The platform also allows for a high level of confidence in decision-making because it's easy to see possible outcomes of each decision. This allows you to change course when needed because you'll have strong data to support your decision.
3. Plan for the future.
Many people think of careful planning as the opposite of flexibility, but in fact, they go hand in hand. Creating a detailed plan for the future of your business allows you to see the big picture. When you have the long-term goals clearly defined, you can more easily make short-term financial adjustments when a situation calls for it.
With your long-term plan, if you need to adjust wages, order more inventory, pay for a major repair, or pause production for a time period, you can see how much of an adjustment is possible.
This will give you the peace of mind that you'll be able to meet your financial requirements when the time comes.
4. Build cash reserves and lines of credit.
The most traditional way to build greater financial flexibility into your business is to add to your cash reserves or ensure you have the ability to borrow money when needed. Those cash reserves allow you to survive when an emergency hits or when you're hoping to move forward with a risky new venture.
A recent survey studying the impact of Covid-19 on small businesses found that 75 percent of small businesses with monthly expenses over $10,000 only had enough cash to last two months or less. That amount of cash wasn't enough to keep many of those businesses open throughout the pandemic.
To ensure you're prepared for any situation, begin setting money aside for your cash reserves and building strong credit. While it might stretch your budget now, you'll be glad when the financial flexibility it provides becomes necessary.