Why is all of this important? Believe it or not, even the biggest and richest companies are considered liquid only if they have cash flow. Consider Apple, which surpassed Exxon a few years ago as the world’s richest company. This means that they have more money in the bank, and produce more revenue, than the world’s largest oil company. Still, Apple would be dead in the water without a strong cash flow profile. In other words, they need to keep producing, keep innovating, and keep growing to maintain good favor with the banks. Why should they care about what the banks think about them if they have more money than any other business? The reason is that banks control the world’s liquidity. Apple doesn’t carry its billions of dollars, now probably approaching one trillion dollars, around in wheelbarrows and briefcases. They use banks, just like everyone else.
This means that cash flow is equivalent to liquidity, which essentially ties into credit. Why in the world would a huge, rich company need credit? They need good credit to leverage their cash. In the world of business, it is all about staying on top, increasing market share, and improving capital valuation. Just like the global credit market, a company must show that it can borrow vast sums of money, and also pay it back quickly. How does it flex its muscles and impress all the banks? With cash flow! It all comes back to the ability to borrow a big pile of cash, remain competitive against the competition while you buy coveted start-up company X, and then pay back the banks that lent you the money. That’s how the business world works.
Think of the credit rating for countries. The United States of America enjoys the high credit rating of the US dollar. This means that no matter how much America borrows, how much it is in debt, other countries and companies will continue to loan it money because America has high productivity. It produces vast amounts of cash flow every day. Some call this GDP, or gross domestic product. Some call it wealthy nation status. It all means one thing: getting that daily bread.
Overall, the term “cash is king” couldn’t be more accurate. With cash in hand, you have the benefit of better buying power. With a positive cash flow, you can not only pay the day-to-day expenses on time but also initiate expansion and growth, such as investment in new offices, employees, machinery, technology and training.
by Dynavistics, Inc