“Cash is king” for individuals and families. Cash is also king when you run a startup or a small business. It is not just an expression in big business or investment portfolio analysis, it is an expression that reflects hidden blessings that shape your overall financial health.
Regardless of the value of your assets, without adequate amount of liquidity, you may run into many financial problems and may risk bankruptcy, loosing your assets and potential opportunities.
As an old adage, cash is king then and cash is still king now. When people think of where to put their money, it is very easy to default to investments in stocks, lands, real estate, or retirement accounts. While these are all good investments and there are many good reasons to invest in them, It is also very important to always consider holding a portion of your financial resources in liquid assets.
Liquid assets are those assets you can easily convert to cash in a very short period of time. Think of holding some amount of cash in regular checking or savings account, opening a money market fund account, buying short-term certificates of deposit (CDs), municipal notes or Treasury bills. You can also hold some amount of inventory for liquidity. These assets are easy to access and are not easily prone to market swings or losses.
Whether you earn a 7-figure salary or have billions in business revenues, without adequate liquidity, you can easily fail financially. This is liquidity time, and will always be. Click To Tweet
Keeping these in mind, let’s move on to why cash is still king!
Reasons Why Cash is Still King
Poor cash or lack of liquidity is the main reason many individuals and business struggle financially. Your earnings may be very high and your business model may be superb; however, you may end up spending all of your earnings or tying them up in non-liquid assets. Without positive cash-flow, you may be risking your overall financial health.
Here are reasons why cash is king for individuals and businesses:
1. Increase Your Ability to Make More Money
Opportunities do not send prior notifications. To grow financially, you need to be able to identify and seize opportunities as they come. In the recent Covid-19 crises, many assets became significantly under-priced. Only investors who have cash could take advantage of such opportunity and buy those assets at their very low prices.
When you have cash, you increase your ability to make more. There is money in liquid assets. Cash is still king. Click To Tweet
Cash is king because opportunities can come up at any time and may no longer be available by the time you are done liquidating some of your non-liquid assets. When you have cash, you are able to secure good opportunities as they come and make more money.
2. Meet Emergencies
You need cash to meet those unplanned situations. These include: medical or dental emergencies not covered by your health insurance, damage to car or home not covered by insurance, legal issues, and possible loss of job or pay-cuts.
Just like individuals, businesses also have emergencies that may require immediate cash payments. Think of natural disasters, legal issues, system crashes, medical emergencies and extended power outages.
Cash is king when you are able to prepare and meet those emergencies as they come without having to take on debts. Debts not only reduce your net worth, but may also reduce your credit worthiness (a significant part of your financial health) when you take on too much debts.
3. Reduce Risk of Loss
Investments in real estate, stocks, bonds and golds are non-liquid assets and may not be easily accessible when you need immediate cash. This means that before you can use the proceeds from these investments, you will have to sell them first.
Now, think of what happens when you have an immediate need of cash and decide to sell off your investments in any of these non-liquid assets. If these assets are currently trading at a price lower than you paid for them, the moment you sell them off to meet your immediate cash needs, you incur losses on those investments.
With these types of investments, you are at the mercy of the market and because of the volatilities in many markets, these investments are prone to losses. However, while these are good investments (and I recommend you invest in them), they are good for long-term investments only. Cash is king in the short-term so as to reduce your risk of loss.
4. Pay Bills Faster without Debts
You need cash to pay your bill faster either as an individual or as a business. Many people pay their bills late because of lack of cash and some charge their bills to their credit cards. While it may appear to be convenient or easy to pay your bills using other people’s money, unless you pay these credit card bills off within the same billing cycle, you will be incurring more fees, adding to your losses and jeopardizing your financial health.
Cash is king in not only paying your bills faster, but also in saving on late fees and interest payments, maintaining a strong credit history and improving your overall financial health. Click To Tweet
5. Survive During an Economic Downturn
Cash is king to survive during an economic downturn. Covid-19 is typical example. Many business closed, revenues plummeted, people lost jobs or faced pay-cuts; but the bills kept coming in. As Nathan Verdi wrote, “Cash is king in the time of coronavirus”
Because of the cyclical nature of every economy, there will always be a period when the economy is operating at less than full potential. Such recessionary periods do not necessarily take away your fixed expenditures such as mortgage or rent payments, insurance, loan payments, utility bills and also average groceries (for individuals).
Without adequate cash, businesses may be forced to downsize, shut down operations or possibly risk bankruptcy; and individuals may be forced to take on new debts or loose their investments.
With cash however, you will have more flexibility and be better able to meet your fixed expenses and survive any economic downturn.
Do you think that cash is still king? I’d like to know your thoughts on this. Please share in the comment below.
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Dr. Charity Ezenwa-Onuaku
Founder & CEO at WealthyGen, Inc.
Dr. Charity is a chartered economist, accountant, and corporate financial executive. She founded WealthyGen to provide financial empowerment programs for women and youth. She is an adjunct professor of finance and a Fintech expert designing and implementing financial education programs.
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Certainly, as an expert in finance and wealth management, I've garnered substantial knowledge and experience in various financial domains. I possess a deep understanding of liquidity management, investment strategies, risk assessment, and the significance of cash flow in personal and business finance.
The article emphasizes the critical importance of liquidity, establishing that "cash is king" not just as a saying but as a fundamental aspect of financial stability for both individuals and businesses. Here are the concepts covered in the article:
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Liquidity and Cash Flow Management: The piece stresses the significance of maintaining a sufficient amount of liquid assets to meet financial obligations and unexpected emergencies. Liquidity refers to the ease of converting assets into cash without significant loss in value.
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Types of Liquid Assets: It delineates various forms of liquid assets, such as cash in checking or savings accounts, money market funds, short-term CDs, municipal notes, Treasury bills, and even inventory that can be quickly converted into cash.
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Importance of Cash Reserves: It highlights the value of having cash reserves to seize opportunities, handle emergencies (e.g., medical expenses, home repairs, or unexpected job loss), and avoid taking on excessive debt.
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Risk Mitigation: The article underscores the risk associated with non-liquid assets like real estate or stocks, which might incur losses if sold during unfavorable market conditions. Having cash on hand reduces the need to hastily sell off these investments at a loss.
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Managing Debts: It emphasizes the advantage of using cash to pay bills promptly, avoiding late fees and interest payments that could negatively impact one's financial health.
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Surviving Economic Downturns: The article exemplifies the importance of cash reserves during economic downturns, like the COVID-19 pandemic, enabling individuals and businesses to weather financial hardships without resorting to extreme measures like bankruptcy or excessive borrowing.
The author, Dr. Charity Ezenwa-Onuaku, appears to be an adept financial professional with a focus on empowering individuals and businesses through comprehensive financial education and planning, especially targeting women and youth.
In essence, the article strongly advocates for the maintenance of adequate cash reserves as a pivotal aspect of sound financial management, applicable to both personal finance and business operations.
