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 tools, such as stocks or bonds. This phrase is often used when prices in the securities market are high, and investors decide to save their cash for when prices are cheaper.
It can also refer to the balance sheet or cash flow of a business; a lot of cash on hand is normally a positive sign, while strong cash flows allow a company more flexibility in regards to business decisions and potential investments.
A third use of the phrase can refer simply to a form of payment. Many businesses only accept cash as a form of payment, as opposed to credit cards or checks, hence the phrase "cash is king."
- "Cash is king" is a phrase that refers to the superiority of cash over other assets or forms of payment.
- Investors use a "cash is king" strategy when securities prices in the market are high and opt to save cash for when prices become cheaper.
- As a form of investment, it is important to not let cash sit idle but rather to invest so that 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 more flexibility in managing their business and their obligations.
- When businesses only accept payment in cash as opposed to credit cards or checks, the phrase "cash is king" is commonly used.
Understanding Cash Is King
In the world of investments, investors who favor the "cash is king" phrase may opt to buy short-term debt instruments or certificates of deposit (CDs) versus buying high-priced securities. If employing a strategy of holding a lot of cash, an investor should work with a financial planner to estimate future cash needs and rates of inflation.
Cash, cash equivalents, and some short-term debt instruments lose spending power over time if they do not offer a return that keeps up with the rate of inflation. This can cause holders of cash as a long-term investment to experience a negative return over time.
For example, a dollar today is worth more than a dollar tomorrow, due to the time value of money. It is wisest to invest cash to where there is a return equal to or above inflation, instead of leaving it sitting idle.
Many businesses prefer payment in cash as it reduces the time of being paid from a credit card company, reduces the risk of bad credit, and allows for the immediate use of the cash.
"Cash is king" also refers to the ability of a corporation or a business to have enough cash on hand to cover short-term operations, buy assets, such as equipment and machinery, or acquire other facilities. More businesses fail for lack of cash flow than for lack of profit.
A significant level of cash also allows businesses to weather economic downturns when people are in savings mode and demand for a business's products or service may be low or non-existent. The higher the level of cash, the easier a business will be able to pay its operating expenses and debt obligations even if revenues are low.
Real World Examples
In recent years, since the global financial crisis, tech companies such as Apple (AAPL) and Amazon (AMZN) have been hoarding cash on their balance sheets as opposed to spending it. In 2017, market disruptor Amazon made an extremely large cash outlay to purchase Whole Foods, sending panic through the grocery industry and putting the stock of companies such as Kroger into a temporary tailspin. Cash gave Amazon the power to make that large purchase and disrupt the markets.
Apple is also known for having a large amount of cash. At the end of Q3, 2020, Apple had $193 billion in cash, which is a staggering number. With that amount of cash the company can pretty much do anything; purchase a variety of businesses, invest in research and development (R&D), expand stores, and stay afloat without any issue during economic downturns. However, given the demand for Apple products, it is unlikely it would see a significant drop in demand for its products even during a downturn.