You have most likely heard the phrase cash is king. Although it may be perceived as a cliché it holds true till this very day. Without the necessary amount of cash, both businesses and individuals can land themselves into trouble.
For businesses, cash flow is a critical factor. It is one of the key elements which can make or break an organisation. Although a company may have strong revenues, the lack of adequate cash flow can bring it to its knees.
The same applies to individuals, although in different contexts. Some people would wonder what to do with their excess liquidity. Potential options include investments, stocks, bonds, property or education amongst others. Although these different options of where to place your money are enticing, it is always a good idea to think about liquidity as this will not be impacted by market swings and crashes. In this article, we shall be discussing why cash is king.
Cash flow enables businesses to meet their commitments
Without the necessary flow of cash, a business runs the risk of going bankrupt. A company that has just been launched may afford to have lower levels of cash flow during the early stages but will need to improve as time progresses. Without it, a company would not be able to honour its commitments, such as paying its monthly expenses.
Investments and growth
Sufficient amounts of cash allow businesses to invest in one-time costs such as infrastructure, real estate, machinery and technology which would in turn enable growth. Significant amounts of cash also allow businesses to acquire other companies, expanding their service offering.
One of the reasons why you as a business or individual should ensure sufficient amounts of liquid cash is due to economic downturns. At certain moments we will be impacted by macro-economic issues which are out of our control. The likelihood is that such crises would eat into the sales of companies and incomes of individuals. Those caught without cash flow to weather the storm may end up having to take regretful decisions. Scenarios might occur where businesses would be expected to make payments right away. These expenses might not be included in the business’ budget plan and hence the need for immediate access to cash.
In times of crisis such as the COVID-19 pandemic, cash has proven to be king once more. In view of the extended period of time that this crisis is taking, will cash continue to be king? Let us know your views in the comments section below.