Cash is King: The Importance of Liquidity in Business Operations

A royal flush poker hand where the king is a $100 bill.

Businesses’ reliance on credit has a long and complex history, dating back centuries and evolving throughout various economic and technological shifts. But, while credit has its place in business, cash remains the undisputed king of operations. A healthy cash flow is the cornerstone of a resilient and adaptable business.

According to the Harvard Business Review, most Americans have spent down their pandemic savings. However, non-banking U.S. firms have increased their hoards of cash, reaching a phenomenal $6.9 trillion, an amount larger than the GDP of all but two countries. Cash now represents $1 out of every $5 of total assets held by non-banking U.S. firms.

Why would U.S. firms hold so much cash instead of investing in higher yield returns? Researchers have offered multiple explanations, including flexibility and taxes, but another reason is what economists term “precautionary cash holdings.”

Companies hold cash because it helps them avoid premature failures that decimate shareholder value.

Recent economic events prompted a dramatic shift between the use of credit and cash:

  • 2008 Financial Crisis: The crisis exposed the dangers of excessive debt and prompted some businesses to become more cautious about credit reliance.
  • COVID-19 pandemic: The pandemic initially increased credit usage for businesses facing disruptions but also led to a renewed focus on building cash reserves for resilience.

Here’s why cash reigns supreme:

1. Unconditional Freedom: Cash is immediate purchasing power, free from interest rates, fees, or lender restrictions. This allows for swift decision-making and seizing opportunities without the burden of debt. Imagine a sudden surge in demand; with cash, you can capitalize on it instantly, while relying on credit comes with approval processes and potential delays.

2. Weathering Storms: Economic downturns can cripple businesses reliant on credit. Sudden loan defaults or tightening credit markets can leave them exposed and vulnerable. A substantial cash reserve acts as a buffer, ensuring essential operations continue even during difficult times. Cash is your first line of defense against unforeseen circumstances.

3. Negotiating Power: Cash gives you leverage in negotiations. Whether it’s securing discounts from suppliers or negotiating better terms with vendors, having ready cash empowers you to bargain for the best deals. This translates to cost savings and improved profitability.

4. Building Trust: Creditors and investors prioritize businesses with strong cash flow. It demonstrates financial responsibility and reduces risk perception. This can translate to easier access to credit in the future and potentially lower interest rates.

5. Psychological Advantage: A healthy cash flow fosters a sense of security and stability within your organization. Employees feel more confident and engaged, knowing the business is not dependent on debt. This can lead to improved morale, productivity, and overall performance.

However, it’s important to note that not all companies are abandoning credit altogether:

  • Startups and high-growth companies: Still rely on credit to fund initial operations and expansion plans, but often accompanied by strong growth potential and investor backing.
  • Cyclical industries: Companies in sectors like construction or energy might utilize credit strategically to manage fluctuating cash flows during different economic cycles.

Ultimately, relying more on cash or credit depends on factors like industry, company size, growth stage, and risk tolerance. However, the trend toward prioritizing cash reserves reflects a growing desire for financial stability and resilience in today’s uncertain economic environment.

In conclusion:

  • Credit can be a valuable tool for expansion, investments, and managing cash flow fluctuations. Used strategically, it can fuel growth and create opportunities.
  • Maintaining a balance is key: Ideally, businesses should have a mix of cash and credit, depending on their specific needs and risk tolerance.

Cash is the lifeblood of any business. While credit can be a helpful tool, prioritizing cash flow ensures resilience, adaptability, and freedom in operations. Remember, a strong financial foundation built on cash is the bedrock of long-term success. And as the old saying goes, “Cash is king, and the king never goes broke.”

When it comes to cash-flow management, one general rule of thumb suggests enough to cover three to six months’ worth of operating expenses. If your business needs an adequate supply of cash, Business Finance Corporation (BFC) can help. We turn Accounts Receivables into liquid cash in as little as 24 hours for established clients.

At BFC, we understand:

  • The importance of cash can vary depending on the industry and business size.
  • Managing cash flow effectively requires careful planning and financial discipline.
  • Various strategies to improve cash flow include reducing expenses, accelerating receivables, and optimizing inventory management.

To establish your factoring account, call BFC at 702-947-3800 or go to https://bfc.vegas/.

Your Partner is Success,

David Cabral