To a degree, all companies can choose the valuation methods they will use to report certain assets. For example, a company has a choice of inventory cost flow assumptions (FIFO, average cost, etc.), and its choice will affect the value of the inventory on its balance sheet. However, this flexibility applies to only certain assets; and this is not what financial flexibility means.
While it is important for a company to be able to meet its financial obligations as they come due, this is not what financial flexibility means.
When a company has a liability, it does not have the ability to decide whether or not to settle that liability. It has a legal obligation to settle the liability by paying it or by providing the goods or services due that the liability represents, unless it is relieved of that obligation by a bankruptcy judge.
Financial flexibility refers to the ability of a company to take actions that will alter the amounts and timing of its cash flows so that it is able to respond to unexpected needs and opportunities. For example, a company with a lot of debt is not financially flexible, because its available cash is committed to servicing its debt and it may have loan covenants that it must comply with. It will not have much spare cash to finance an expansion or to meet an unexpected need, nor will it have the ability to borrow much more. A firm with a high degree of financial flexibility can better survive an economic downturn or other difficult setback, and it is in a better position to take advantage of profitable and unexpected investment opportunities. Moreover, a company with greater financial flexibility has a lower risk of failure.
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