Why Cash is Still King for Individuals and Businesses

“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.

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.

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.

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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