Many people have heard the saying "cash is king." It is the phrase successful businesses have lived on for ages. The status of having excessive amounts of cash is admired. Those with cash, have tremendous opportunities to expand, innovate, buy out their competition, and survive short term declines in sales.
When I started my first full-time job, my employer lived by the "cash is king" philosophy. They were, and continue to be, a company that is doing quite well, and why would I think that this "cash is king" statement isn't true? As I have spent more time working with people and entrepreneurs, I have shifted my mindset from "cash is king" to "cash flow is king." What is cash flow one may ask? To oversimplify the definition, it's the difference between income and expenses. This is typically measured every month and can be a positive or a negative number (hopefully not negative). Business owners are always fretting about cash flow, and rightfully so. Negative cash flow for extended months can lead to businesses and households to borrow money to cover the shortage. What is the easiest way to borrow money one may ask? Credit cards are the typical go-to for acquiring debt and at a heavy price. Many credit cards can carry a 20 - 25% annual interest expense. With these high-interest rates, comes larger expenses. This could lead to more negative cash flow and lead to more debt.
Why would people not view their family expenses in the same manner as a business? The family unit is the business, and families bring in income and spend money just like a business does. If the goal is to increase profits for the business, why would families act any differently? If your family is saving (profiting) more, they can use this to invest back into their own family. Most families will look at upgrading their home, seeking a degree for a better opportunity, start buying rental properties or invest more in the market to seek out more returns, which in return could help them save more money.
Rich Dad, Poor Dad is a book written by Robert Kiyosaki. He talks about cash flow in more detail by mapping the flow of money and how the pattern of money flow is different for rich people than they are for everyone else. Kiyosaki mentions that families need to focus on buying assets instead of buying liabilities. Guess what most people end up buying? Most people end up buying liabilities to make themselves feel better or to impress our friends and neighbors. Kiyosaki defines assets and liabilities very simply. An asset is anything that adds income to your account, while liabilities are things you own or buy that remove money from your account. If you think about what he is saying, it makes sense. A business that generates a profit is an asset, while a business that is generating losses, would be a liability. No one wants to own a business that's losing money. Kiyosaki also makes the point that a mortgage payment is an expense and is, therefore, a liability. However, if you sell your house at an increased price than when you purchased it, it would then be an asset.
So what is the point of all this information? It's pretty simple. If you want to have more cash, you must focus on cash flow first. To increase your cash flow, you must do the following.
- Increase your income
- Decrease your expenses
- Do both (most effective option)
If you think about positive cash flow (savings), you understand it takes cash flow to create cash. You can't build wealth from scratch without positive cash flow. And, if you have figured out the cash flow game and have accumulated cash, how do you optimize your cash flow to maximize cash? Why would you want to do this? Because you CAN, and you may just be able to change the life of someone who can't do it by making a difference through charitable giving or legacy creation. That is why "cash flow is king."