Why "Cash is King" Should be Your Mantra — Business Owner or Not
"Cash is king" is the key to staying afloat in economic uncertainty.
The Federal Reserve has raised interest rates to the highest point in 15 years. This half-a-point increase is the seventh consecutive rate hike this year. The interest rate now stands between a steep 4.25% to 4.5%. As economists and business leaders go back and forth about whether or not we will experience a recession in the coming year, it is always better to be safe than sorry.
Inflation has been rising for months, and many people and businesses have saved money wherever possible. But the idea that "cash is king" may be more helpful than simply "saving money."
Related: Are We Headed for a Recession? It's Complicated.
What does "cash is king" mean?
"Cash is king" may mean something different depending on who you are and what you do, but the central idea is that cash is more valuable than other forms of capital. Companies keep this idea top-of-mind when holding on to cash to have reliable and liquid capital on hand to pay for immediate needs like equipment, staffing, and other necessities. Companies are more likely to fail due to not having enough cash on hand versus not making enough profit.
Having a large amount of cash on hand can provide a protective buffer against financial losses and allow for the opportunity to purchase discounted assets during a market downturn. In the current economic climate, with unprecedented levels of market uncertainty, the importance of cash cannot be overstated.
For businesses, cash is king because it allows them to hold on to valuable assets, sell some that may be strategic but smaller in scale, and make strategic acquisitions when the time is right. Private equity firms, for example, are reportedly holding on to their cash rather than rushing to make deals as they are unsure of the direction of asset valuations. Similarly, debt and hedge funds focus on the lending side of their business, sitting on 'dry powder' and waiting for yields to rise for greater profits.
Related: Separating the Wheat From the Chaff: Cash Is King Again
Cost-cutting measures add up
"Cash is king" is a mantra for businesses and individuals. There are several ways for everyday people to build up cash reserves.
- Buy groceries in bulk. Often, purchasing more products leads to fewer costs. If you have a wholesaler near you, the membership fee can be dwarfed by the savings you will accrue. Additionally, when you buy in bulk, you will make less frequent trips to the grocery store — saving money on gas.
- Adjust your thermostat. Energy costs are high right now. You can save some money though putting a little less strain on the grid. Whether it's cold outside and you lower your temperature a few degrees or the opposite, less energy usage means more money in your pocket.
- Cut excess spending. While it may seem obvious, it's easy to forget your lunch or reusable bottle at home and use that excuse to grab some fast food with coworkers or buy bottled water. Cutting back on these expenditures can save you thousands.
- Take advantage of rebates. If you are in the market, there is no better time to buy that electric vehicle or add solar panels to the roof and get as much as $7,500 in refunds or rebates from the government.
Additionally, ensure you are taking decisive, thought-out actions with your money — if you aren't a skilled investor, hold off on investing your money until the market has settled and is waiting for a direction.
Related: Do You Have a 'Cash-Flow Conundrum'? If Yes, Remind Yourself That Cash Is King (and Queen).
Do your research
As we have seen for the last year, the Federal Reserve can make changes quickly and without warning. Businesses should take note of this trend and ensure they are not making any rash acquisitions, investments or selling assets without doing thorough research.
Suppose we did a transaction that closed the day before the Federal Reserve raised rates. That organization would have saved .5% on the cost potential. If the term was five years, that's 2.5% savings for the life of the loan. Half a point can be a lot of money. If we're doing a $1B transaction, 2.5 percent is $25 million in savings over five years.
Whether you are a small business owner or the CEO of a major company, you can always learn from the most sophisticated investors, like banks and insurance companies. These institutions build their credibility and capital by understanding the stock market and other complex transactions. Align yourself with their thinking by reading their marketing pitch. Understand their motives.
Related: Strapped for Cash? Three Modern Ways To Take Out A Small Business Loan.
Cash is security
It's important to remember that cash is not just about saving money — it can also provide security and peace of mind in times of economic uncertainty. Nothing lasts forever, but having a cushion of cash can give you the flexibility to weather any financial storms and come out stronger on the other side.
Businesses and individuals need to have a healthy cash reserve to be prepared for the future. Whether it is used to survive a potential recession or take advantage of opportunities as they arise, cash can be the key to success in uncertain times. By saving money, holding on to assets, and building up a cash reserve, businesses and individuals can protect themselves financially and be well-prepared for the future.
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