Cash Flow, is it still King or have we moved on from 2008 and the Global Financial Crisis (GFC)!
Cash flow, what is it? How is important in business? How does it affect us? Why was it such a focal point and huge buzz statement in 2008? Is it still a buzz word? Why do we focus on it?
These questions will be looked at in further detail.
Cash flow is the physical amount of money that flows into and out of a business. Why is cash King? This phrase was synonymous with the GFC, why? The phrase 'Cash is King' is used to describe the situation when securities are so high that investors decide that holding cash (savings) will generate greater returns until the price of the security drops, it is valued too high. The phrase was used around the time of the GFC and was used in reference to the ability of a business to have enough cash to cover short term expenses and run the operations of the business. This was the very reason it was used in the GFC. Many businesses had such high levels of debt they didn't have the liquidity (cash) to pay for the operating of the business. Banks ran dry i.e. lent money, and business got stuck.
More businesses fail due to a shortage of cash flow than a shortage of profit.
Is this still an issue after the GFC? Well, yes as was just stated many businesses fail due to lack of cash flow or a lack of cash flow management. Knowing what tools to use and how to monitor cash flow is one of the greatest challenges for organisations. Many people or businesses don't know that this is a high risk. They also have a lack of knowledge to understand how this impacts them until it is too late.
From 2000 - 2008 companies were highly geared which meant they had high levels of debt and weren't too worried about cash until the funding ran out and the GFC became the market crash of the 1980's. Businesses today are still lowly geared, however the focus and the pain of the GFC is slowly fading. There is some comfort in holding less cash now, although businesses have focused more when their debt is due and to set up so it is easier to fund if a GFC type of an event was to occur again.
Although the distant memory of the GFC will fade, businesses will increase their level of gearing and find that growth and inflation will be unstoppable. We will potentially have another GFC not in the same form and not in the form that will be easily recognisable. Businesses will then be focusing on cash making sure they can fund the operation of their business. That is why it is and will remain an important phrase. Cash is King; although it will fade into the background it is the phrase that should be the backbone, the foundation of every business.
Nanette F. Lowe