You are on page 1of 8

Qualitative Essay on Cash Is King

Name: Tamara-E-Tabassum
ID: 1211002020
Course: Fin 340
Section: 04
Faculty: Saad Mohammad Maroof Hossain (SDF)
School of Business and Economics,
North South University, Dhaka.

Cash Is King

Introduction:
Cash is king is an age-old saying often used to refer to the belief that money i.e. cash is more
valuable than any other form of investment tool. The phrase also refers to the ability of a corporation
or a business to have enough cash on hand to cover short-term operations, buy assets such as
equipment and machinery, or acquire other facilities. It can also refer to the balance sheet or cash flow
of a business. Generally a lot of cash on hand is a positive sign, while strong cash flow allows a
company more flexibility regarding business decisions and potential investments. The origin of cash is
king is not clear. It was used in 1988, after the global stock market crash in 1987, by Pehr G.
Gyllenhammar, who at the time was Chief Executive Officer of Swedish car group Volvo. The phrase
was widely used during the global financial crisis, which started in the fall of 2008. In the recession
which followed the financial crisis, the phrase was often used to describe companies which could avoid
share issues or bankruptcy. Cash is king is relevant also to households. It states that, without the
proper amount of cash on hand, both of businesses and consumer households can run into major
trouble, and even be forced into bankruptcy. Businesses must have cash on hand for various reasons,
such as investing in new infrastructure and dealing with unexpected expenses. Moreover, free cash
flow of a business is often cited as a key factor in its potential for long-term success. A company may
have all the revenue in the world, but without the ability to generate cash, it can easily fail.

Definition of Working Capital Management:


Having enough cash in hand is known as working capital management in theory of finance which refers
that the level of cash company needs to have on hand in the short term to keep the business running
i.e. pay its employees, suppliers and so on. Any business model will not be complete until its working
capital model is in place. But many business entities ignore this important issue while designing their
business plan. And the bitter truth of this working capital is if the business hasnt got cash in hand to
keep business running, itll be out of business. The cash balance of a company is found in balance
sheet, not in the income statement and working capital at any particular time depends on two
categories of balance sheet which are: current assets and current liabilities. So, working capital =
current assets current liabilities.

Purposes of Holding Cash

Free cash flow is particularly dependent on the noncash portion of the working capital model where
accounts payables and accounts receivables exist. Companys goal should be minimize the amount of
receivables which company has to collect from its customers and maximize its level of accounts
payable without violating its credit term. Thus company may manage to have cash flow in short term
and for any company to survive, cash flow is the single most important financial factor. A company
could have fantastic revenue, reasonable expenses, and significant income, but if its financial
operations are not designed efficiently, it could still have negative cash flow. And without positive cash
flow, any company, no matter how promising the business model, will go bankrupt. Of course, if a
business has just been launched, it may be able to endure negative cash flow in the short-term in
hopes of achieving long-term success. But eventually, any company must focus on creating positive
cash flow. Without it, a company will not even be able to accomplish the simplest of tasks i.e. paying
its monthly expenses.

Another important issue for which businesses need to keep cash in hand is capital expenditure
investments. To grow, a company often will need to invest in factories, real estate, machinery, or
technology. These are typically one-time costs that require significant funds. Without cash on hand, a
business may not be able to make these necessary investments and, as a result, may never be able to
experience company growth. A business can take out a loan, but even a loan will generally require a
significant down payment or collateral, which will in turn require that the company have access to
cash. Loans also come with interest rates that can further eat into a companys bottom line. Company
acquisition to expand business is another reason why company needs to have positive cash flow. Here,
company acquire other companies to expand their own business and it works as a way to branch out
into new areas of industry. Without the necessary cash, company would never be able to buy or,
acquire a valuable company at a reasonable price.

Positive cash flow also enables a company to survive during down economies. Without cash on hand,
company would be forced to drastically downsize its employee operations and may even have to
declare bankruptcy in order to pay off its fixed expenditures during recessions. With cash, the company
will be more flexible and better able to survive the downturn. Also it will be able to prepare for future
emergency situations.

Small businesses need to keep their expenses as low as possible. One way to do so is to avoid
electronic transaction systems including services like wire transfers and PayPal, which often charge
excessive fees. By paying with actual cash, businesses can cut back on these fees, which can
significantly reduce their costs and increase their bottom line profits, leading to more cash. So, holding
hard cash also cuts transaction cost.

Two key ways that public companies reward their shareholders is through dividends and share
repurchases. Dividends are a fantastic way to put money back in the shareholders pocket without
forcing them to sell their ownership. Share repurchases are an excellent way for management to
express its confidence in the companys future growth potential and, in some situations, to signify that
it feels its shares are undervalued on the public market. By instituting a share repurchase plan, each
remaining share will become more valuable. However, neither dividends nor share repurchases would
be options for a public company without cash.

Particularly for smaller business, cash can be essential for paying bills. Not only do some creditors only
accept cash, but other forms of payment can take longer to process, leading to unnecessary late fees.
In those cases, paying in cash is the preferred method.

Many small businesses have had to learn the hard way that lenders are becoming stricter with how
they loan money. If a business has cash available, it can better take advantage of opportunities to
expand and make important acquisitions, options that may otherwise not be available in the absence
of loans. So, holding hard cash also helps these small businesses to expand the business in the
absence of loans.

For Households:

While cash is essential for the survival of any business, it is also extremely important to the individual
consumer and household for a variety of reasons among them liquidity is the most important reason.
The advantage of cash is that households can spend it however and whenever they want unlike
treasury bonds and stocks. There is also no risk of loss of holding hard cash in hand. Cash, unlike the
best of stocks, will maintain its value even during a stock market crash. Having physical cash on hand
or money in a checking account allows households to pay for unexpected expenses without reaching

for a credit card and incurring high interest debt. So, it also the best solution during any personal
emergency situation.

Some businesses, such as certain restaurants and taxis, will not accept credit cards, debit cards, or
checks. Many small retailers also issue a surcharge on small purchases. Carrying cash can simplify
your life as a consumer and protect you from paying extra fees. So, cash is very much needed for this
type of cash-only transactions.

Holding cash can indirectly protect market investments by giving you the peace of mind to not sell
them during economic downturn. If anybody have a cash reserve, they wont feel dependent on market
investments to pay for daily living expenses. Another advantage is that if an investment opportunity
presents itself, household have the means to immediately invest. Without this, they would either be
forced to sell shares of other investments, perhaps at a time when the market is down, or forgo the
investment opportunity altogether.

Taking out a loan or running into debt on the credit card will force to pay high interest rates and fees.
By sticking with cash, households not only avoid hurting your credit score, but you know you wont
have to pay an amount above and beyond the initial price of your purchase. You also free yourself of
the stress associated with making monthly payments on different purchases and credit cards.

During a deflationary period, households have to worry about banks failing or stocks and bonds losing
value. Luckily, there is no such worry with cash, which will increase in value in a deflationary period. By
having some cash on hand, it can ensure that they will enjoy at least some gains in the portfolio should
a deflationary period take hold of the economy.

One of the common problems consumers face is that estimates for large projects are often higher than
expected. With a few amount of available cash, they will be able to make the necessary payment.

Moreover, cash is becoming increasingly necessary for larger purchases like a home or car. Taking out
a loan incurs huge amount of interest debt and also huge down payments. Without the necessary cash

on hand, households may not be able to make that large purchase. So, cash gives the ability to make
large purchase. Another important issue is, holding cash gives you psychological peace of
mind. Moreover, holding cash can indirectly protect market investments by giving you the peace of
mind to not sell them during economic downturn.

Two examples of working capital management (i.e. Dow Jones and The Costco) can be explained to
show the importance of having enough cash in hand when its needed:
Dow Jones & Company, known best for its newspaper, The Wall Street Journal and it business was
based on this working capital management for over a century. But in the late 1980s, when the digital
revolution took place The Wall Street started losing its subscriber because of changed publishing world
and internet. Moving from print to digital was possible for them because Dow Jones had the ability to
use other peoples money to pay its bills. In 1992, Dow Jones launched online version of The wall Street
and from 1999 to 2006 it quickened its digital pace by developing a joint venture with Reuters. So,
Dow jones & company shows that negative working capital is helpful in coping with dramatic changes.
By itself a better working capital model isnt enough. So, they went for a joint venture which came out
successfully with a couple of loss-making years.

Another example is, The Costco; Costco has become the preeminent ware house club retail chain.
Largely because its management designed its working capital model to gain competitive advantage
over other business entities in the industry. Costco collected cash from its customer almost
immediately, no credits were allowed. And also they charged a membership fee from their customers
to buy from them. So, they have the opportunity to sell their inventories for their popularity and high
sales volume and also able to pay their accounts payable off. Though it makes a thin profit margin, but
its able to drive away is competitors from the market with a well-designed working capital model.
SO, a negative working capital is highly desirable in a sense that it makes it easier and less costly to
enter the market and get started with business. And also it makes much easier for business to grow
further. Examples of Dow Jones and Costco shows that, new young entrepreneurs can start a new
venture in such an industry whose working capital requirements are low enough to get the advantage
of almost negative working capital.

Working capital model measures another important factor of any business entity which is liquidity.
Liquidity of a company is measured by current liquidity index which shows that if the company has
enough hard cash to cover its liabilities without borrowing. If the company has enough cash, there is
less chance of being bankruptcy in short term. Every company requires different level of cash at a

particular time period. There are three approaches to determine companys cash holding which are:
low amount of cash holding. Moderate amount cash holding and high amount of cash holding.

A company might want to maintain a low amount of cash holding if it wants to keep less money as idle
cash. Idle cash is bad for company as well as for economy as it remains unutilized and cannot give
returns. But at the same time its highly risky for the company because if sudden emergency situation
arises, company cannot manage immediate cash to handle the situation right away which in the worst
case can even result in bankruptcy. SO, maintaining a low cash holding is highly risky for company.

Another criteria is moderate amount of cash holding where company wants to hold such a level of cash
which is neither less nor excess. And the last criteria is high amount of cash holding where company
holds an excessively high amount of cash as holding.
But based on historical data, high cash holding is safe but inefficient because of idle money. On the
other hand, low cash holding is efficient but very risky as company can go bankrupt at any point of
time.

But there is also downside of holding cash. When someone holds money his/her money is not going to
grow anymore and one can lose purchasing power in todays competitive market. Like any strategy,
more isnt necessarily better and taking a moderate strategy is a good idea according to financial
specialists.

Conclusion

Finally, in todays highly competitive, increasingly globalized economy, cash is most certainly the
crucial factor of business. Without cash company loses reputation for bankruptcy and is labeled as

defaulter. Its a good idea to prioritize the importance of cash for both kind of entities in the economy
i.e. businesses and households. For a business, its availability is essential to not only avoid the
possibility of bankruptcy, but also to take advantage of various expansion and growth opportunities. As
a consumer, cash represents one of the safest investments possible while preparing you for uncertain
times.
In todays world, achieving negative working capital is considered as Holy Grail for its high
opportunity of growing the business further. Free cash flow is one of the most important factor while
achieving negative working capital (i.e. Dow Jones and Costco case scenario).
Therefore, cash is certainly the king, moreover its the most crucial factor regarding survival of the
business.