Cash Is King for Businesses and Individuals Alike

Cash is a vital part of our daily lives, and its importance extends far beyond personal transactions.

Businesses often prefer cash over credit cards because it reduces the risk of fraud and chargebacks. In fact, a study found that 71% of small businesses prefer to receive cash payments.

Having cash on hand can also provide a sense of financial security, especially during economic downturns. Many people recall the 2008 financial crisis, when cash became a highly sought-after commodity.

In some countries, cash is still the primary means of payment, and businesses that accept cash tend to thrive in these markets. For example, in India, where digital payments are not as widespread, cash transactions account for a significant portion of the country's GDP.

Cash is a vital resource that provides flexibility during financial crises. Having liquid funds available can be invaluable in times of financial uncertainty.

Having cash on hand can be more important than earning a high return on investment. A crisis can strike at any moment, and having cash can be the difference between financial stability and disaster.

The phrase "cash is king" has been around for a while, but its exact origin is unclear. It first appeared in George N. McLean's 1890 book How to do Business, or the Secret of Success in Retail Merchandizing.

One of the "Twelve Wise Business Maxims" in McLean's book is "Avoid credit, remembering that cash is king, credit is a slave". This phrase suggests that having cash on hand is more important than relying on credit.

The phrase gained more popularity after the global stock market crash of 1987, when Pehr G. Gyllenhammar, then CEO of Volvo, used it to emphasize the importance of cash reserves during times of economic uncertainty.

Some notable individuals who have popularized the phrase include billionaire property developer Alex Spanos and Jack Welch, an NFL team owner of Greek heritage.

Broaden your view: Trade Credits

Having cash on hand can be invaluable in times of financial uncertainty.

Cash investments like money market funds, savings accounts, or bank CDs don't often yield much, but they provide liquidity and flexibility.

Having liquid funds available can be vital because of the flexibility it provides during a crisis.

This flexibility can be a lifesaver in unexpected situations, such as a sudden medical emergency or a job loss.

A different take: Working Capital Funds

Having cash can prove to be invaluable, especially during tough times. It gives businesses, investors, and individuals the financial flexibility to get through difficult periods.

Cash allows you to take advantage of opportunities as they arise, like buying undervalued assets during crises. This happened during the Covid-19 pandemic when many assets became significantly under-priced.

Having cash on hand enables you to secure good opportunities quickly, which might not be available by the time you're done liquidating non-liquid assets. Opportunities don't send prior notifications, after all.

Cash is a treasured asset because it provides the financial flexibility to grow your wealth.

A different take: Present Value of Growth Opportunities

Investors value cash because it provides a sense of security and stability in uncertain times. Without a positive cash-flow, businesses risk their overall financial health.

Cash is king for individuals and businesses alike, and investors know this. It allows them to cover unexpected expenses or take advantage of new opportunities.

Check this out: Do Angel Investors Get Equity

Poor cash or lack of liquidity can lead to financial struggles, even for those with high earnings and a solid business model. This is a major concern for investors who want to see a steady return on their investment.

Businesses with a steady cash flow are more attractive to investors because they are less likely to default on loans or go bankrupt. This reduces the risk for investors and makes them more likely to invest in those businesses.

Having a solid emergency fund is key to meeting unplanned expenses, whether medical emergencies, car damage, or job loss. Aim to save three to six months of living expenses in a high-yield savings account, money market account, or bank CDs.

Cash is essential for businesses too, especially in industries with cyclical fluctuations. Companies should hold enough cash to cover three to six months of operating expenses, depending on their industry's cyclicality and balance sheet strength.

Related reading: Cash Account vs Margin Account

In an economic downturn, cash is the lifeline that helps businesses survive. Without adequate cash, companies may downsize, shut down operations, or risk bankruptcy. Individuals may be forced to take on new debts or lose their investments.

Having a stable job and good health can reduce the need for a large emergency fund, but freelancers and those with less predictable income should consider holding more cash on hand. Personal preference and peace of mind also play a role in determining how much cash to keep in a brokerage account.

In general, investors prefer to hold between 5% and 20% of their portfolio in cash as a hedge and for buying opportunities. Younger investors with steadily deposited funds might not want to hold much cash, but retirees may want to keep enough cash to cover several months of expenses to avoid selling shares at lower prices during a market sell-off.

Cash is a crucial aspect of running a business, as it allows you to operate and grow in an orderly manner.

Having sufficient cash means you can take advantage of opportunities that come your way, whether they're unexpected or planned.

A scramble for cash can lead to difficult decisions, such as choosing between making payroll and other priorities.

To avoid this, it's essential to have an ongoing cash flow forecasting process in place.

This process will alert you to potential cash flow difficulties or opportunities, giving you time to take action.

Taking action now to prevent cash flow problems will save you from scrambling later.

Explore further: Will Destroy the Galaxy for Cash?