Cash is king

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"Cash is king" is a colloquial phrase sometimes used in analyzing businesses or investment portfolios. It may refer to the importance of cash flow in the overall fiscal health of a business. In corporate finance, the expression refers to the fact that only future free cash flows or dividends are relevant for valuation and not, for example, accounting earnings. For managers and investors, it may also describe the advantage of having a large percentage of cash or short-term debt instruments available either due to falling financial markets or due to the availability of investment opportunities. The phrase has also come to be associated with businesses that only accept cash, rather than card payments.

Contents

The concept of "cash is king" describes the importance of sufficient cash as an asset in the business for short term operations, purchases and acquisitions. A company could have a large amount of accounts receivables on its balance sheet which would also increase equity, but the company could still be short on cash with which it can make purchases, including paying wages to workers for labor. Unless it was able to convert its accounts receivable and other current assets to cash quickly, it could fail and be technically bankrupt despite a positive net worth.

History

The origin of "cash is king" is somewhat unclear. In George N. McLean's 1890 book How to do Business, or the Secret of Success in Retail Merchandizing, [1] one of the "Twelve Wise Business Maxims" is "Avoid credit, remembering that cash is king, credit is a slave".

The phrase became more popular following the global stock market crash of 1987 by Pehr G. Gyllenhammar, then CEO of Swedish car group Volvo. [2]

Since 2000, the expression, "cash is king", has occasionally appeared in articles on the investing website Motley Fool , [3] and is part of radio host Dave Ramsey's hourly show introduction

The phrase was frequently used by billionaire property developer Alex Spanos, whose 2002 book, Sharing the Wealth: My Story, [4] includes the phrase, used as a chapter title, and later adopted by another NFL team owner of Greek heritage, Jack Welch. [5]

Widely used during the global financial crisis of 2007–2008 and the Great Recession that followed, the phrase was also often used to describe companies which could avoid share issues or bankruptcy.[ citation needed ]

The phrase is often used by convicted jewel thief Larry Lawton, [6] although in a different context to mean it is best to rob cash as you do not have to sell it to a fence, potentially making the criminal process riskier.[ citation needed ]

The phrase has been repurposed more recently to indicate opposition to the increasing trend of transactions being made using card rather than physical currency. [7] This meaning is different to the original usage because, from an accountancy perspective, there is no significant distinction between cash held in a bank and physical currency. The original usage suggests the superiority of liquid assets over fixed assets, but in this repurposed usage, the distinction made is between physical currency and cash reserves held digitally with a financial institution.

The phrase has had its resurgence in more recent years in the form of protests over cashless societies, and the right to privacy.

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<span class="mw-page-title-main">Balance sheet</span> Accounting financial summary

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<span class="mw-page-title-main">Factoring (finance)</span> Financial transaction and a type of debtor finance

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<span class="mw-page-title-main">Cash and cash equivalents</span> Highly liquid, short-term assets

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<span class="mw-page-title-main">Digital currency</span> Currency stored on electronic systems

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<span class="mw-page-title-main">Goodwill (accounting)</span> Intangible asset recognized in the acquisition of a firm

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<span class="mw-page-title-main">Asset</span> Economic resource, from which future economic benefits are expected

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<span class="mw-page-title-main">Deposit account</span> Bank holding into and from which money can be placed or withdrawn

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<span class="mw-page-title-main">Cashless society</span> Economic state

In a cashless society, financial transactions are not conducted with physical banknotes or coins, but instead with digital information. Cashless societies have existed from the time when human society came into existence, based on barter and other methods of exchange, and cashless transactions have also become possible in modern times using credit cards, debit cards, mobile payments, and digital currencies such as bitcoin.

References

  1. ↑ McLean, George (1890). How to do Business, or the Secret of Success in Retail Merchandizing. Jefferson Jackson. p. 120. Retrieved 13 May 2024.
  2. ↑ Levkowitz, Lotan (Jun 23, 2020). "When Cash is King, Knowledge is Queen". Medium. Grove Ventures. Retrieved 29 June 2021.
  3. ↑ "Fool on the Hill — Cash is King" by Whitney Tilson; Motley Fool; November 21, 2000.
  4. ↑ Welch, Jack (2002). Sharing the Wealth: My Story. Regnery Publishing. p. 97. ISBN   9780895261588 . Retrieved 29 June 2021.
  5. ↑ Blodget, Henry (30 May 2009). "Jack Welch: How To Kick Ass In These Tough Times". Business Insider. Insider Inc. Retrieved 29 June 2021.
  6. ↑ "Larry Lawton | From Jewel Thief to Honorary Cop Part Two | The Jordan Harbinger Show 433". Jordan Harbinger. 2020-11-19. Retrieved 2022-09-04.
  7. ↑ Kenny, Ellen (22 May 2023). "'Cash is king' - do businesses want to go cashless?". Newstalk. Retrieved 2023-09-02.
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