Definition
The accounting term financial flexibility is used to describe a company's ability to react to unexpected expenses and investment opportunities. Financial flexibility is usually assessed by examining the company's use of leverage as well as cash holdings.
Explanation
Companies with superior financial flexibility are both able to survive tough economic times as well as take advantage of unexpected investment opportunities. Companies that are unable to respond adequately to unforeseen setbacks may lack the resources to survive longer-term economic downturns.
While the exact measure of financial flexibility may vary among analysts and investors, universally accepted categories of flexibility include:
Leverage: the use of debt to increase the total profits returned to the company's equity holders.
Cash Holdings: includes paper money, coins, checks, money orders, and money on deposit with banks.
The most common measures of leverage include:
Debt Ratio = Total Liabilities / Total Assets
Debt to Equity = Total Liabilities / Owner's Equity
As the above ratios increase, the risk associated with financial hardships grows. High ratios can also limit the company's ability to borrow, thereby lowering the company's financial flexibility. When drawing conclusions about the relative performance or risk of a company, benchmark comparisons should be made with competitors in the same industry
Related Terms
The financial term leverage refers to the use of debt to increase the total profits returned to the company's equity holders.
Moneyzine EditorNovember 6th, 2024
As it applies to the accounting discipline, cash includes paper money, coins, checks, money orders, and money on deposit with banks. In general, an item is classified as cash if a bank will accept it for deposit.Moneyzine EditorNovember 6th, 2024- The debt ratio is a simple indicator of the leverage used by a company. The debt ratio measures the proportion of the total assets that are financed by debt, and not by stockholders.Moneyzine EditorNovember 6th, 2024
The debt to equity ratio is an indicator of the leverage used by a company. The debt to equity ratio is considered a more stringent measure than the related debt ratio, since this metric tells the analyst how much debt is used to finance the company's assets relative to equity.Moneyzine EditorNovember 6th, 2024
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:Moneyzine EditorNovember 6th, 2024.png)
The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
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