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 (finance) 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. This phrase appears on his merchandise. [7]

The phrase has been repurposed more recently to indicate opposition to the increasing trend of transactions being made using card rather than physical currency. [8] 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.

Related Research Articles

<span class="mw-page-title-main">Cash</span> Physical money

In economics, cash is money in the physical form of currency, such as banknotes and coins.

Investment is traditionally defined as the "commitment of resources to achieve later benefits". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broader viewpoint, an investment can be defined as "to tailor the pattern of expenditure and receipt of resources to optimise the desirable patterns of these flows". When expenditures and receipts are defined in terms of money, then the net monetary receipt in a time period is termed cash flow, while money received in a series of several time periods is termed cash flow stream.

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

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.

An economic bubble is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth, and/or by the belief that intrinsic valuation is no longer relevant when making an investment. They have appeared in most asset classes, including equities, commodities, real estate, and even esoteric assets. Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles, are attributed to central banking liquidity.

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

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.

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

Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount". An investment normally counts as a cash equivalent when it has a short maturity period of 90 days or less, and can be included in the cash and cash equivalents balance from the date of acquisition when it carries an insignificant risk of changes in the asset value. If it has a maturity of more than 90 days, it is not considered a cash equivalent. Equity investments mostly are excluded from cash equivalents, unless they are essentially cash equivalents.

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

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Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is a type of insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property and casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.

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

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A foreign exchange hedge is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies. This is done using either the cash flow hedge or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles as well as other national accounting standards.

<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

A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

Supply chain financing is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf. The term also refers to practices used by banks and other financial institutions to manage capital invested into the supply chain and reduce risk for the parties involved.

<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. ↑ "Cash is King Graphic Tee". Larry Lawton's Store. Archived from the original on 15 Jan 2024. Retrieved 2022-09-04.
  8. ↑ Kenny, Ellen (22 May 2023). "'Cash is king' - do businesses want to go cashless?". Newstalk. Retrieved 2023-09-02.
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