Cash is still king in successful business

PUBLISHED: 09:38 11 May 2020 | UPDATED: 09:42 11 May 2020

Good cash flow is still crucial to good business, says Peter Sharkey. Picture: Getty Images

Good cash flow is still crucial to good business, says Peter Sharkey. Picture: Getty Images

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There are many advantages to holding cash during periods of volatility, says finance expert Peter Sharkey.

Ask business people what is it that makes an enterprise consistently successful and the majority will answer ‘cash’. A positive cash flow is the single most important feature of a successful business.

Cash is needed to pay salaries, rent, business rates and dividends; it’s required too when making capital investments, acquiring assets or buying another business and it comes in particularly handy when an enterprise has to survive an economic downturn, especially one of unprecedented magnitude.

In other words, if you’re running a business, cash is undoubtedly king.

The same mantra applies to individuals, as millions of people discovered this week after it was revealed that most British adults are now paid by the state. Suddenly, lump sums that have wallowed for years in bank savings accounts earning negligible interest offer more than a modicum of comfort to their owners.

Less than four months ago, few investment managers would have recommended that individuals keep much more than 5pc of their assets in cash. Today, a sizeable proportion of folks are more content to forego capital growth, for the time being at least, and sit on a much larger cash pile than they ordinarily would. In a low-inflation world, cash offers safety, which is why millions of people apply the royal moniker ‘king’ to it.

Over the past couple of months, this column has suggested that this is a bad time to be selling almost any form of investment asset, such as shares, that have fallen in price, an approach to which I strongly adhere. However, unless you’re feeling brave it’s not necessarily a fantastic time to be dipping your toes into the stock market either.

Let me give you an example. Three weeks ago, I wrote about the travails of Carnival, the cruise ship owner and operator, noting the dramatic fall in its stock market value. But, I asked, “… how much will it be worth this time next year after the virus has been condemned to history and millions of people are looking to get away on holiday, almost irrespective of cost? When couched in these terms, bolder investors may believe Carnival is worthy of further consideration.”

The article first appeared on 17 April when Carnival’s closing share price was 912p. By 29 April, the share’s value had risen to 1,160p, an increase of more than 27pc in less than a fortnight. However, as if to provide the starkest proof of market volatility, as I write (7 May), Carnival’s share price has dropped to 960p, a fall of 17pc. If you enjoy the gut-wrenching peaks and troughs of a fairground’s roller-coaster, you may also delight in buying shares capable of giving a similarly white-knuckle ride. If your blood pressure is a tad dodgy, cash offers a safer alternative.

Of course, cash is needed for day-to-day transactions; your investment portfolio may have risen in value, but you cannot use paper profits to pay your mortgage or the rent. Yet today it’s more likely that an investment portfolio comprising say, shares, bonds and gold will have suffered a fall in value and should you need to sell to raise cash, you take a risk. Not only does the process take time and incur a cost, the price at which you sell is subject to whatever the market will bear. Putting yourself at the market’s mercy can be tricky, as the example of Carnival cited above shows.

During periods of economic uncertainty (and they don’t come any more uncertain than at present), the likelihood of incurring a loss rises significantly. It follows that while investing should underpin any long-term financial plan, it would be folly to ignore the value of cash.

Indeed, holding a cash reserve offers a form of investment security because it can ensure that there is no need to sell investments during periods of extended volatility, but perhaps more significantly, cash provides its owner with leverage. Should an investment opportunity such as property present itself, a ‘cash buyer’ usually has the upper hand as he or she can purchase it almost immediately.

Advocating the broad appeal of cash has not been fashionable for many years, but today few commentators would question its attraction, a stance this column fully supports.

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TAM Asset Management Ltd offer investors the opportunity to invest their savings in Investment ISA portfolios comprising a variety of different funds pursuing long-term cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.

Please note: with investing, your capital is at risk.

THE WEEK IN NUMBERS

111 million

German company Hello Fresh says it has delivered more than 111 million meal kits since the start of the global lockdown, helping it swing from a €26.1m loss to a €63.1m profit. The company sends boxed ingredients to its subscribers who cook them at home.

156,743

The number of new cars registered in the UK in April slumped by more than 97% to a post-war low of 4,321. A year ago, 161,064 cars were registered, but there were 156,743 fewer new car buyers to be seen last month.

$475 million

The Disney Corporation this week reported profits of $475 million for the first quarter of 2020. Most companies would be delighted with such a result, but incredibly, this figure represents a fall of 91% when Disney’s profits are compared with those of 2019.

For more financial advice, check out Peter Sharkey’s regular column, The Week In Numbers.


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