Cash

Understanding Cash

• Cash refers to money in the physical form of currency, such as banknotes and coins.
• Cash flow is the total amount of money being transferred into and out of a business.
• Net cash is the amount of cash a business has after all its outgoings are subtracted from all its incomings.
• Having a positive cash flow is crucial for a business to survive and thrive, as it means there is enough money to cover outgoings.

The Importance of Managing Cash

• Effective cash management is critical for a business success.
• Businesses must monitor their cash flow carefully, ensuring that they have enough to cover immediate and short-term expenses.
• Insufficient cash can lead to business failure, even if the business is profitable on paper.

Cash as an Investment Option

• Keeping a portion of your wealth in cash is good for safety and liquidity - cash can be accessed quickly and easily in case of an emergency or unexpected expense.
• However, cash does not earn interest or grow over time, meaning it is not the best long-term investment option.

Cash in Financial Planning

• An essential component of financial planning is maintaining a suitable emergency fund, often advised to be between three to six months’ worth of living expenses, in cash or a cash equivalent.
• Incorporating cash into financial planning allows a business or individual to meet their short-term financial obligations.
• Successful financial planning also requires a business to invest its excess cash in assets that can generate return, growing the wealth of the business over time.

Cash and Risk Management

• Keeping cash reserves can be seen as a form of risk management, providing a buffer against unforeseen circumstances.
• Holding too much cash for too long, though, can be risky due to inflation diminishing its purchasing power over time.
• Therefore, it’s important to strike a balance between holding cash and investing it to create growth.