Strategic advice The importance of achieving financial agility

Financial agility means having the financial capacity—plus the business processes and technology that enable it—to reallocate capital quickly as market circumstances change.

Financially agile companies have attributes that set them apart from other businesses, such as:

• A stronger balance sheet with more cash, including higher working capital
• Processes to speed up cash inflow and accurately predict cash outflow
• Regular review of cash-related data and capital allocations
• A business-wide focus on efficiency in operations to reduce “leaks” in cash flow
• A top-to-bottom appreciation for and focus on the company’s balance sheet strength, in addition to the profit and loss (P&L) statement

Although there are broad differences in typical working-capital balances from one industry to another, working-capital management distinguishes the top performers in every industry. The most successful among them are able to harness a negative cash conversion cycle in which their customers pay faster than the company pays its suppliers—resulting in what McKinsey & Company calls “cost-free financing.”^{Disclosure 1}

Financial agility can be measured both quantitatively, with metrics such as working capital, and qualitatively, by assessing how responsive and nimble your financial decisions are. But how do companies improve those measures?

Here are several tactics that can help boost agility and build a stronger, more resilient business.

Collect and analyze balance sheet data. Financially agile businesses go beyond routine financial reporting to ensure they know how much cash they have and understand their future cash inflows and outflows.

By reviewing this data regularly, decision-makers in finance and other functions can start using this information to make decisions that strengthen the balance sheet. Although profit and loss are important, too many leaders outside of finance fail to consider other balance sheet effects in their decision-making.

Making more financial information available on demand to more people could require additional investment in financial information systems, such as new software or new business processes. However, this investment can yield enormous returns through better decision-making.

Strengthen processes and delivery. Weak financial processes and operations can hide cash leakages that may not show up in the P&L, at least anytime soon, but which result in a weaker balance sheet.

Consider factors such as:

• Is there a clear, fast, and efficient process for invoicing customers and getting paid?
• Are products and services produced in the planned time frame, or are operational weaknesses slowing delivery?
• Are inventory levels able to fulfill near-term customer needs while not being overstocked or sitting in the warehouse for months?

Renegotiate with vendors and customers. Are there opportunities to speed up customer payments or develop more favorable terms with vendors? These don’t have to be zero-sum opportunities, either.

Some customers may be happy to pay faster for a small discount, and some vendors may be open to more favorable terms if balanced with other changes that make their cash flow more predictable, for example. Over time, small changes can improve your company’s overall cash position and boost financial agility.

Review capital allocations. Capital investments—in new programs, products, markets, equipment, inventory, or anything else—should never be a “set it and forget it” decision. In most cases, an initial forecast or business case probably guided the capital investment. Returning to those allocations regularly and asking if they’re performing as planned is an integral part of being financially agile.

An investment that’s not delivering the projected return may need stronger management to turn it around. Or, in some cases, that investment may no longer be the company’s best allocation for that capital, creating an opportunity to free up money for other purposes or to boost working capital.

Conduct scenario planning. Finally, regular scenario planning can help leadership teams anticipate shocks and business opportunities. At the most basic level, scenario planning could involve projecting what would happen to your company’s balance sheet if current market conditions improved, stayed the same, or worsened.

Companies can also conduct specific scenario planning based on their industry, geography, economic fluctuations, or regulatory requirements. Consider how next year’s hurricane or wildfire season, trade or tax policy changes, or the emergence of a disruptive technology like AI might affect business.

Financial agility isn’t a destination—it’s a process. An increase in working capital may mean your company’s financial agility has improved, but that doesn’t mean financial agility is a project that can be checked off as done.

Instead, leaders should remain vigilant about opportunities to improve financial agility, not only in terms of financial metrics like cash balances but also the processes and systems they put in place to strengthen the business. Those could include maintaining a strong balance sheet, enhancing information access, and keeping financial agility front and center in management decisions.

As market conditions change and your company evolves, your Truist relationship manager can help you continue to seek opportunities to enhance financial agility.