Home Corporate Financial flexibility and corporate employment : an insight

Financial flexibility and corporate employment : an insight

June 11, 2024

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This article has been written by Bhaskar pursuing a Diploma in US Corporate Law and Paralegal Studies from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The COVID-19 pandemic has caused significant economic, financial, and operational disruptions for the firm. In response to that, many companies have taken drastic measures, such as laying off employees. These changes have highlighted the role of the firm’s financial features in determining how the firm responds at the time of the pandemic in the economy and how it affects the lifestyle of people and has a huge impact on the market.

Understanding financial flexibility

It means that a firm can avoid financial distress at the time of the negative impact and fund investment when profit opportunities arise. As we know, financially flexible firms have greater cash holdings and easier access to external debt. Financial flexibility is a key factor in determining the financing and employment decisions that affect firms at the time of the occurrence of financial crises in the economy. We majorly focus on the two major labour decisions that were announced during the first three months of the pandemic: (i) to reduce the workforce and layoffs of the workers and (ii) to increase pay or hire additional workers when it is essential. Financial flexibility is one of the key features corporations need to cope with a changing and unstable economy. It can adjust and react to changes in the degree of capitalization, opportunities, or threats. This flexibility is attained through effective financial resource management, sound decision-making, and risk versus return balance.

Key components of financial flexibility

Liquidity management

The ability to keep sufficient cash balances and readily accessible assets empowers a company in its short-term obligations by enabling it to access new opportunities unobtrusively while also navigating any unexpected challenge.

Debt structure

Financial flexibility also requires balance in the use of debt. However, debt may serve as a source of required capital to use its funds for expansion or operational needs but it could, in excess, limit the company’s capacity to respond effectively at times when adversity arises.

Cost control

Effective cost management allows the company to use its resources properly. This includes cost optimisation of operational expenses, evaluation of capital expenditures, and finding opportunities for reducing costs without compromising performance.

Strategic investments

The essence of financial flexibility is that the company has a platform to invest in technology, research and development, as well as employee training. These investments are aimed at long-term sustainability and competitiveness.

Risk management

Flexibility in the management of financial risks, like currency fluctuation, interest rate variation or market volatility, becomes an important aspect. Hedging strategies and risk-mitigating mechanisms allow the company to remain financially viable.

CFO survey data

Our baseline data source is the Global Business Outlook survey of US CFOs from Duke University in 2020. This survey gives information on how companies reacted to the sudden emergence of the COVID-19 crisis. The period of recruitment for this survey began on February 11, 2020, before the spread of the coronavirus across America. The closing round of this survey was recorded on April 10, 2020. Due to being centred on March, they called it the “March 2020” survey. They received responses to the survey from 520 CFOs. The overall response rate is 19.5%, which seems high in comparison with conventional executive surveys and investor surveys.

Role of firm heterogeneity in financial flexibility

When the impact of COVID-19 spread across the world, it became clear that shock severity was not equal across firms. In the March 2020 survey, CFOs were asked about their firms’ risk exposure to COVID-19. Determinants of this self-assessed risk exposure are analysed in Table IA.2 in the Internet Appendix. It is observed that lower levels of workplace flexibility and investment are linked with greater perceived COVID-19 risk exposure. Lower financial flexibility is also linked to higher COVID-19 risk exposure, although the statistical relationship between these two metrics is not very pronounced, indicating that CFOs do certainly consider 202 analysis. CFOs also note that more customer interactions (direct or indirect) are associated with higher COVID-19 risk. Although subjective, such a COVID-19-linked evaluation provides an idea of the CFO’s perceptions concerning the multiplicity of problems posed by COVID-19. Specifically, the moderator effect of corporate flexibility serves as a source to delve into its real consequences.

Role of flexibility during the COVID-19 pandemic

Corporate flexibility has affected the firm’s real decisions during the pandemic. It helped us organise the framework related to the empirical work.
The financing constraints help in decision-making for the firm at the time of crisis, even if no crisis originates from the financial sector, because the firms rely more on financial resources to support their operations and avoid financial distress. The issues focus more on several firms’ financial policies during COVID-19.
Workplace flexibility is the ability for employees to work from home. It was a major issue during the COVID-19 crisis. It is also reflected in the analysis of the work done from home during the pandemic. Workplace flexibility became a critical part of the pandemic, as it helped in better social distancing practices and helped the employees to balance and care for their family members when it was needed. Firms whose employees cannot work easily from home may need to adopt additional health protocols to control and maintain social distancing at the workplace. Low workplace flexibility shows the inability to work from home, and it harms firms and their productivity during the pandemic.
Due to the unexpected pandemic outbreak, firms need to carefully consider their ability to invest in their ongoing projects. The company can use greater flexibility with the investment. When there are any unfavourable conditions for the firms during the pandemic, they can utilise greater investment from capital spending during the crisis.

COVID-19 has significantly changed the way of life for corporations across industries, concerning both corporate flexibility and financial flexibility worldwide. Here are some key aspects of how the pandemic has influenced these areas:

Corporate flexibility

Remote work and digital transformation: The pandemic spurred a sudden change to remote work, meaning that companies had little choice but to learn how to do business in new ways. Organisations that were nimble and able to rapidly adopt digital transformation initiatives performed well in preserving operational continuity.
Supply chain disruptions: The pandemic revealed weaknesses in global supply chains. Organisations with more adaptive supply chain management were able to respond much better to disruptions as opposed to firms that witnessed challenges in procuring materials and delivering products.
Agile decision-making: The highly dynamic nature of the business world during COVID-19 demanded companies make quick adjustments. People with agile decision-making processes proved to be more resilient.

Financial flexibility

Liquidity challenges: Liquidity problems were due to revenues suddenly coming under heavy disruptions for many businesses. Companies that had greater financial flexibility gained some sound benefits as they were able to tap into their cash reserves or alternative sources of financing to maintain themselves when economic uncertainties prevailed.
Debt management: Firms with a well-thought strategy regarding debt levels were better prepared for the downturn. Organisations resorted to renegotiating the terms of debt, accessing government support programmes, and other initiatives to relieve financial distress.
Cost containment and efficiency: The need to save monetary resources resulted in prioritising cost control and operational effectiveness. Organisations with high flexibility in finances were capable of cost-cutting without compromising long-term sustainability.

Impact of financial flexibility on workforce planning

The impact of financial flexibility on workforce planning is significant and multifaceted. Companies with financial flexibility have the agility to adapt their workforce in response to market fluctuations, ensuring their long-term success.

Hiring and layoffs

During economic downturns, financial flexibility allows organisations to temporarily reduce hiring or implement cost-cutting measures, such as furloughs or part-time work. This enables them to preserve cash and weather the storm without resorting to mass layoffs.

Conversely, during periods of growth, companies with financial flexibility can ramp up hiring quickly to capitalise on opportunities and expand their operations. They can attract top talent by offering competitive salaries and benefits, ensuring they have the skilled workforce needed to drive growth.

Workforce restructuring

Financial flexibility enables companies to undertake workforce restructuring initiatives when necessary. They can invest in training and development programmes to upskill or reskill existing employees, aligning their skill sets with changing business needs. This proactive approach helps companies avoid costly layoffs and ensures a smooth transition during periods of change.

Employee retention

Financial flexibility allows organisations to offer competitive compensation and benefits packages, making them an employer of choice. This helps attract and retain top talent, reducing turnover rates and the associated costs of recruiting and onboarding new employees.

Talent acquisition

Companies with financial flexibility can invest in talent acquisition initiatives, such as employer branding campaigns and recruitment marketing. This helps them attract a wider pool of qualified candidates and build a strong talent pipeline. They can also offer relocation assistance and other incentives to attract top talent from different regions or countries.

Innovation and expansion

Financial flexibility allows organisations to invest in innovation and expansion initiatives. They can allocate funds for research and development, new product development, and market expansion. This enables them to stay competitive, drive growth, and create new job opportunities.

Overall, financial flexibility provides companies with the agility and resilience needed to navigate market fluctuations and ensure their long-term success. It empowers them to make strategic workforce decisions, attract and retain top talent, and invest in innovation and expansion, ultimately contributing to a thriving and sustainable workforce.

Talent retention and employee engagement

Financial flexibility plays a pivotal role in the success of companies, empowering them to offer competitive compensation packages that enable them to attract and retain top talent. By providing bonuses, stock options, and comprehensive retirement plans, organisations not only enhance employee satisfaction and engagement but also strengthen their overall competitiveness in the market. This strategic approach helps them secure the services of highly skilled professionals who contribute significantly to the company’s performance and long-term growth.

Moreover, financial flexibility allows organisations to invest in training and development programmes, fostering a culture of continuous learning and growth. This commitment to employee development benefits both the individual and the company. Employees are equipped with the necessary skills and knowledge to adapt to evolving industry trends, embrace new technologies, and contribute innovative ideas. This, in turn, enhances their productivity, job satisfaction, and overall career prospects.

For the company, investing in training and development programmes leads to a more skilled and adaptable workforce capable of driving innovation and effectively responding to market challenges. By promoting a culture of continuous learning, organisations create an environment where employees are encouraged to embrace new opportunities, challenge themselves, and reach their full potential. This leads to increased employee engagement, higher job satisfaction, and reduced turnover rates, ultimately contributing to the organisation’s long-term success and sustainability.

Adapting to changing market conditions

In volatile economic environments where change is the only constant, financial flexibility becomes a critical lifeline for businesses. Companies that possess a solid financial position have a distinct advantage in navigating the unpredictable terrain of the market. They can respond promptly and decisively to shifts in consumer demands, technological advancements, and regulatory changes.

A strong financial foundation enables organisations to make strategic investments in research and development, expand into new markets, and acquire complementary businesses. These proactive moves can position them ahead of competitors and open up new avenues for growth. Furthermore, during times of economic downturn, companies with financial flexibility can weather the storm more effectively. They can maintain operations, protect jobs, and emerge stronger when the economy recovers.

Financial flexibility goes beyond having ample cash reserves. It encompasses a comprehensive approach to managing financial resources. This includes efficient cash flow management, a balanced debt-to-equity ratio, and a diversified investment portfolio. By adopting sound financial practices, companies can mitigate risks, seize opportunities, and ensure long-term sustainability.

In addition to safeguarding existing jobs, financial flexibility also positions organisations for future success. Companies that can adapt quickly to changing circumstances are more likely to thrive in the face of disruption and innovation. They can attract top talent, develop cutting-edge products and services, and establish strategic partnerships. This agility enables them to stay competitive and maintain a leadership position in their respective industries.

Conclusion

Financial flexibility is an enduring comparative advantage that defines the employment strategies of corporations and their overall performance. The level of financial flexibility enables a company to be versatile, as it can quickly respond and readjust its operations to changing economic conditions, market dynamics, or unexpected challenges. Financial flexibility plays a significant role in determining how well an organisation can manage its workforce. From its inability to navigate the challenges, investment in employees, and growing opportunities, financial flexibility helps to create a favourable workspace and ensure corporate employment by promoting stability, adaptation and strategic decision-making. Financial flexibility and economic uncertainty affect the stability of the market. While financial flexibility is important, it is not sufficient to understand how a firm will react to economic uncertainty. Non-financial policies also play a significant role in predicting a firm’s reaction to uncertainty.