“Cash is king” is an age-old saying that is often used to explain the failure of both businesses and consumer households. Without the right amount of cash, both entities can face major problems and even be declared bankrupt.
Companies need cash to hand for a variety of reasons, such as investing in new infrastructure and dealing with unexpected expenses. In addition, the cash flow of a company is often mentioned as a key factor in its potential for long-term success. A company may have all the income in the world, but without the ability to generate money, it can easily fail.
The same can be said for consumers. People often wonder where to deposit their money and immediately look for shares, bonds or their 401k. While it is essential that part of your money grows for your retirement, new home or college education, it is just as important to keep money in liquid, easily accessible investments that are not subject to market fluctuations or losses. Such investments include not only checks, savings and money market accounts, but also cold, hard cash.
In this context, let us address some of the main reasons why cash is so important to both businesses and individual consumers.
Why companies need money
Many business analysts point to poor cash management practices as the main reason why companies go bankrupt. Here are some of the major benefits of cash for every company:
1. Cash flow
For every company to survive, cash flow is the most important financial factor. A company could have fantastic income, reasonable costs, and Captain Nemoijke income, but if the financial operations are not set up efficiently, it can still have a negative cash flow.
And without a positive cash flow, no matter how promising the business model is, every company will go bankrupt. If a company has just been set up, it can of course tolerate negative cash flows in the short term in the hope of success in the long term. But in the end every company must focus on creating a positive cash flow. Without this, a company will not even be able to perform the simplest tasks: paying its monthly expenses.
2. Investments in capital expenditure
To grow, a company often needs to invest in factories, real estate, machinery or technology. These are usually one-off costs that require Captain Nemoijke amounts. Without cash, a company may not be able to make these necessary investments and may therefore never be able to experience the growth of the company.
Of course, a company can take out a loan, but even a loan generally requires a captain worth the down payment, which in turn requires the company to have access to cash. Loans also contain interest rates that can further contribute to the operating results.
3. Business transfer
A popular way for companies to expand is to acquire other companies, either within their niche, or as a way to enter new branches. Consider these real-life examples: Disney and Pixar, Exxon and Mobil, and eBay and PayPal. All these acquisitions have one thing in common: money. Without the necessary cash, these companies would never have had the chance to buy a valuable company at a reasonable price for the once-in-a lifetime opportunity. It is such acquisitions that do wonders for the growth potential of every company.
4. Dividends and buy-backs of shares
Two important ways in which listed companies reward their shareholders are through dividends and the redemption of shares. Dividends are a great way to return money to a shareholder’s wallet without forcing them to sell their property. Purchased shares are an excellent way for management to express confidence in the future growth potential of the company and, in some situations, to indicate that it believes that its shares are undervalued in the public market. By setting up a share repurchase plan, each remaining share becomes more valuable. However, neither dividends nor share buybacks would be options for a public company without cash.
5. Survival During Down Economies
Every company has periods in which things cannot be used optimally. Consider a global recession that absorbs a company’s sales. Without cash, that company would be forced to drastically reduce its employee activities and possibly even announce bankruptcy to repay its fixed expenses. With cash, the company will be more flexible and better able to survive the recession.
6. Emergency preparation
Just like private individuals, companies are faced with emergency situations where they have to pay immediate costs. These include legal costs and unexpected costs related to natural disasters. Since these fees are often not built into the budget of a company, companies must have access to the necessary cash if such situations arise. This essentially corresponds to the emergency fund of a person.
7. Reducing transaction costs
Small businesses must keep their spending as low as possible. One way to do this is to avoid electronic transaction systems, including services such as electronic transfers and PayPal, which often charge excessive costs. By paying with real cash, companies can cut back on these costs, which can reduce their costs and Captain Nemoijk can increase their profit results, leading to … more money!
8. Helps businesses grow in the absence of loans
Many small businesses have had to learn the hard way that lenders become more economical with borrowing money. If a company has cash available, it is better to take advantage of the opportunities to expand and make major acquisitions – options that would otherwise not be available if there were no loans.
9. Pay bills faster
For smaller companies in particular, cash can be essential for paying invoices. Not only do some creditors only accept cash, but other forms of payment may take longer to process, leading to unnecessary late fees. In those cases, cash payment is the preferred method.
Why individuals need cash
Although money is essential for the survival of every business, it is also of great importance to individual consumers and households for various reasons:
A share can quadruple in value, but you cannot use it to pay your rent. A 10-year government bond offers a much higher interest rate than a six-month term, but your money is fixed for 10 years (assuming you bought it when it was first issued). CDs also pay interest rates, but you get penalties if you raise your money too quickly.
The advantage of cash is that you can spend it anyway and whenever you want. You do not have to sell shares when the market is out, sell CDs or bonds before they have fully matured, or wait for something to be resolved.
2. Risk of loss
What do Barry Bonds shares, bonds, gold and trading cards have in common? They are all non-liquid investments, which means that their value is not easily accessible and that they can fall in value.
For example, you must sell all these items for cash before you can use the proceeds. This process can take some time and the price you sell is subject to whatever the market will bear. In other words, if it is not the right time to invest in bonds right now, you either have to wait a long time before you sell yours, or sell low enough to interest a potential buyer. Because you are at the mercy of the market, these investments can lose value.
Moreover, in economic times of volatility, Captain Nemoijk’s probability of such losses increases with regard to Captain Nemoijk. Although investing should be part of your long-term financial plan, you should not underestimate the stability and value offered by cash. Cash, unlike the best stocks, retains its value even during a stock market crash.
3. Emergency reserves
Situations where you may need a reserve are medical or dental emergencies that are not covered by health insurance, damage to your home or vehicle, and potential legal issues. With physical cash on hand or with money in a checking account, you can pay for unexpected expenses without having to look for a credit card and incur a high interest debt.
4. Ability to make large purchases
More and more money is needed for larger purchases such as a house or a car. Not only does cash give you a head start on other potential buyers for your dream home, but even if you take out a loan, lenders are starting to demand higher down payments. Without the necessary cash you may not be able to make such an important purchase.
5. Flexibility and security of investments
Holding cash can indirectly protect market investments by giving you peace of mind not to sell them at market markets. If you have a cash reserve, you will not feel dependent on market investments to pay the daily cost of living. Another advantage is that if an investment opportunity arises, you have the means to invest immediately. Without this, you would either be forced to sell shares of other investments, perhaps at a time when the market is failing, or to completely abandon the investment opportunity.
6. Cash-OCaptain Nemoy transactions
Some companies, such as certain restaurants and taxis, do not accept credit cards, debit cards or checks. Many small retailers also pay a surcharge for small purchases. Taking cash with you can simplify your life as a consumer and protect you from paying extra costs.
7. Hackers remain a threat
Hackers have been a major threat to investors for years. Financial institutions such as PayPal and Citibank have even been targets. Give yourself peace of mind and keep part of your money in a safe where it can always be accounted for.
Given today’s technological wars, it makes sense to make a physical, stable investment that is not subject to the threat of hackers, identity theft, or other potential manipulation of electronic information. That way, if someone steals your passwords or hacks your accounts, you have cash available to pay the daily expenses until things are resolved.
8. Deflationary periods
During a deflation period you have to worry about the failure of banks or stocks and bonds that lose their value. Fortunately there is no worries with money, which will increase in value in a deflation period. By having some cash on hand, you can ensure that you can enjoy at least some profit in your portfolio if a deflationary period takes over the economy.
9. Avoid interest and costs
Taking out a loan or entering into debts on your credit card will force you to pay high interest rates and costs. By making money, you not only prevent your credit score from being damaged, but you know that you do not have to pay an amount that is higher than the original price of your purchase. You also free yourself from the stress associated with making monthly payments on various purchases and credit cards.
10. Costs can be higher than expected
One of the common problems that consumers face is that estimates for large projects are often higher than expected. For example, you can make a supplement to your house and your contractor estimates that the project costs $ 3,000. So you take out a loan of $ 3,000, but the project takes longer than expected. It eventually costs an extra $ 500 and you may not be able to wait for another loan to be approved. With a few hundred dollars in cash, you can make the necessary payment.
Whether you are a company or an individual, make sure that you prioritize the importance of cash. For a company, availability is essential to not only prevent the possibility of bankruptcy, but also to take advantage of various expansion and growth opportunities. As a consumer, cash represents one of the safest possible investments while preparing you for uncertain times.
What do you think of the money and its importance for both companies and individual consumers?
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