I’m sure that you’ve heard the adage “cash is king” at some point. But, where exactly did that phrase originate from? And, what exactly does it mean?
How Important is it to Have Cash on Hand?
During times of uncertainty, cash, without question, reigns supreme. The reason? It’s the most valuable liquid asset an individual or business can possess.- The amount you have in a checking or savings account.
- Money market assets.
- Marketable equity securities (stocks).
- Marketable debt securities (bonds).
- U.S. Treasuries.
- Mutual funds.
- Exchange-traded funds (ETFs)
- Automobiles
- Items you own ranging from clothing to jewelry
- Accounts receivable.
The Importance of Cash on Hand for Businesses.
There are several underlying factors why a business can go bankrupt. Market conditions, poor decision making, financing, and especially a lack of profitability are all to blame.1. Maintain a positive cash flow
“Cash flow, or the measure of the amount of money being transferred in and out of your business, can ultimately make or break your organization—regardless of how profitable your business is on paper,” explains Peter Daisyme is a previous Due article. “While conceptually simple, launching, and executing a cash flow management strategy can be tricky even for financially experienced organizations.”But, just how big of a deal is cash flow? Peter argues that it matters more than revenue.
“It’s hard to say that cash flow matters ‘more’ than revenue since both are defining financial metrics for your organization,” he adds. “However, revenue and even your net profit can be high while cash flow suffers—and if your cash flow creeps too far into negative numbers, you may never fully recover.”
2. Can help your business scale
If you want your business to grow or expand, then you’re going to have invested in it. I’m referring to upgrading your technology, purchasing property, or hiring new employees. Often, these are one-time purchases. So, it makes more sense to use your existing assets instead of taking out a loan or line of credit and being stuck paying back interest for years to come.3. You’re able to pay bills on time
I can tell you from personal experience that this juggling act can be stressful. Let’s say that your phone bill is due on the 18th of the month. The problem? It’s the 15th and a client still hasn’t paid you. Even worse? You don’t have enough money to cover the bill.If you miss this payment, you’re going to be slapped with a late fee. Your service may also get turned off. And, let’s not talk about those sleepless nights as you worry about paying your bills.
4. Reduce transaction (and security) costs
For small businesses, in particular, it’s imperative that you keep your costs as low as possible. One way to achieve this is by eliminating payment processing fees from wire transfers, credit/debit cards, or gateways like PayPal. The most glaring starting point is only to accept cash payments.- Choosing a low-fee payment processing system.
- Factoring these fees into your pricing.
- Negotiating a lower fee.
- Accepting multiple forms of payments to balance out these fees.
5. Allows you to meet emergencies
“Emergencies are not a matter of if; they are a matter of when,” states Amanda Abella in another Due piece. Everything from natural disasters, equipment/system crashes, legal issues, or medical emergencies that aren’t covered by insurance are lurking around the corner. “That’s why business owners need to know how to financially prepare for emergencies.”“Business owners can’t rely on a paycheck hitting their bank account every two weeks,” adds Amanda. “If they aren’t working, they aren’t making money. If a hurricane takes you out for a week or longer, you’ve lost a lot of money.”
6. Ensures surviving an economic downturn
As we’re continuing to witness, external factors like COVID-19 can lead to an economic downturn. While this figure will probably increase, as of August 31, 2020, Yelp reported that “163,735 total U.S. businesses on Yelp have closed since the beginning of the pandemic.”The Importance of Cash on Hand for Individuals
Cash on hand doesn’t just apply to businesses. It’s also necessary for the average Joe or Jane.1. It’s liquid
The best thing about cash, or any other liquid asset you own, is that it’s there when you need it. For instance, you might have been furloughed because of the pandemic. Is your 10-year Treasury bond going to pay for rent, groceries, or other necessary expenses?2. Keeps your investments diversified
“Diversification is an investment strategy where you own a variety of assets that will perform differently over time,” clarifies Due Founder and CEO John Rampton. “The idea is that it provides security and mitigates risk. If an investment fails or underperforms, you won’t lose everything.”At the same, “a diversified portfolio shouldn’t contain too many options,” adds Rampton. “Diversification is a protection against ignorance,” said Warren Buffett. “[It] makes very little sense for those who know what they’re doing.”
3. Gives you psychological peace of mind
“If you’ve invested for at least 10 years, you have been through a stock market decline,” states Barbara Friedberg, MBA, MS, author of How to Get Rich; Without Winning the Lottery. “It hurts. It’s painful to watch your portfolio value decline.” Even worse? Having “to sell assets after a decline because you need the money.”“The psychological medicine of holding cash can’t be underestimated,” adds Friedberg. “Imagine how you would feel, even if you don’t need any of the money in your investment portfolio for a long time if you saw the S&P 500 index drop 20 percent or 30 percent, and you didn’t have any cash in your portfolio.”
4. There are still cash-only transactions
For the last month, I’ve been self-disciplined enough not to get takeout. I finally decided to treat myself to pizza last weekend. After I called in my order, I remembered that my favorite pizzeria is still cash-only.Thankfully, I had cash in the house. If not, I would have had to hit up a nearby ATM. Not the end-of-the-world. But, that would have defeated the purpose of getting delivery.
5. Helps you avoid interest and fees
If you recall, businesses are responsible for late fees. You are as well. So, if you’re a freelancer, and a client has paid you, you cannot pay your bills. And, if you don’t have a cash cushion to get you by, expect to be penalized.6. Covers the unexpected
Life is full of surprises. Some pleasant. Others? Not so much. And, it only gets worse when you don’t have an emergency reserve to handle these unexpected expenses.In fact, even just $1,000 set aside would suffice.
But, it’s just not emergencies that are unforeseen. There will be times when costs may be higher than anticipated. Case in point, getting a quote on a car repair or redoing your home’s bathroom.
How Much Cash on Hand Should You Have?
It’s often advised that you should have between 3 to 6 months of living expenses in an emergency fund. So, if you need $3,000 to cover your most important expenses, think mortgage, utilities, and food each month. That means you’ll need at least $9,000 saved.But, what about business owners?
“Cash also gives these companies the flexibility to make acquisitions or other investments during periods of market turmoil,” he adds. “Investors need to keep those things in mind when looking at a company’s cash balance.”
And, if you’re struggling to save cash, start out small. If possible, put $100 a month to the side. Within a year, you’ll have $1,200. That might not sound like much. But, it’s without question better than having no cash on hand.