What is cash is king?
“Cash is King” is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tool, such as actions Where obligations. This phrase is often used when prices in the securities market are high and investors decide to save their money when prices are cheaper.
It can also refer to the balance sheet Where cash flow from a company ; a large amount of cash is normally a positive sign, while strong cash flow allows a business more flexibility with regard to business decisions and potential investments.
A third use of the phrase can simply refer to a form of payment. Many businesses only accept cash as a form of payment, as opposed to credit card or checks, hence the phrase “cash is king”.
Key points to remember
- “Cash is king” is an expression that refers to the superiority of cash over other assets or forms of payment.
- Investors use a “cash is king” strategy when market prices for securities are high and choose to save money when prices become cheaper.
- As a form of investment, it is important not to leave cash unused, but rather to invest in such a way that the returns are at least equal to inflation.
- “Cash is king” also refers to when companies have large cash balances on their balance sheets, allowing them greater flexibility in managing their business and obligations.
- When businesses only accept cash payments, as opposed to credit cards or checks, the phrase “cash is king” is commonly used.
Understand that cash is king
In the investment world, investors who favor the phrase “cash is king” may choose to buy short term debt instruments or certificates of deposit (CD) rather than buying high priced securities. If using a strategy of holding a lot of cash, an investor should work with a financial planner to estimate future cash needs and inflation rates.
Cash, cash equivalents and some short term debt instruments lose purchasing power over time if they don’t offer a return that keeps up with the rate of inflation. This can cause holders of cash as a long-term investment to experience negative returns over time.
For example, a dollar today is worth more than a dollar tomorrow, because of the the time value of money. It is wiser to invest money where there is a return equal to or greater than inflation, instead of leaving it idle.
Many businesses prefer cash payment as it reduces the time it takes to get paid by a credit card company, reduces the risk of bad creditand allows immediate use of the money.
“Cash is king” also refers to the ability of a company or business to have enough cash to cover short-term operations, purchase assets, such as equipment and machinery , or acquire other facilities. More companies fail to lack of cash than for lack of profit.
A large level of cash also allows businesses to weather economic downturns when people are in saving mode and request for a company’s products or services may be weak or non-existent. The higher the cash level, the easier it will be for a business to pay its operating expenses and debts, even if its revenues are low.
Real world examples
In recent years, since the global financial crisis, technology companies like Apple (AAPL) and Amazon (AMZN) have accumulated cash on their balance sheets instead of spending it. In 2017, market disruptor Amazon made a huge cash outlay to buy Whole Foods, spreading panic in the grocery industry and sending shares of companies such as Kroger into a temporary slump. Cash gave Amazon the power to make that big purchase and disrupt the markets.
Apple is also known to have a large amount of cash. At the end of Q3 In 2022, Apple had $179 billion in cash, which is a staggering number. With this amount of money, the company can do just about anything; buy various businesses, invest in research and development (R&D), expand your stores and stay afloat without any hassle during economic downturns. However, given the demand for Apple’s products, it is unlikely to see a significant drop in demand for its products even during a downturn.