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Happiness is a Positive Cash Flow

August 13, 2015

Sunday, I saw Donald Trump on TV proclaiming that he doesn’t need contributions since he is rich and will fund his campaign himself.  On Monday, I read a news item that he will be accepting contributions.  In that same news item, it was reported that even though he is definitely a rich man, his wealth is not readily liquid and a Bloomberg analysis estimated that he has about $70 million in liquid assets.  Not too shabby but certainly not enough to fund a presidential campaign.  However, what Donald Trump has or does is not much of a concern for me, but his cash situation as it relates to businesses is, so I am using this opportunity to share some insights about cash.

Cash is the life blood of a business.  Cash amounts.  Cash flows.  Cash changes.  No matter what anyone tells you, cash is the bottom line you must watch and accumulate.

Simplistically, knowing your cash balance gives you a sense of how you are doing – if it goes up, you are making money – if it goes down, you are losing money.  Of course not everything is that simple.  There are factors such as accounts receivable and inventory that can increase and have profits absorbed there; or accounts payable can decrease also absorbing profits as can unfinanced equipment purchases.

I have seen many extremely profitable businesses consistently plow the profits back into the company and even borrow to pay the income taxes with the owners taking next to nothing out for themselves to grow their personal net worth – and then the business hits a losing streak and doesn’t have the internal or personal resources, i.e. cash to meet the challenges it is confronted with, hastening the decline.

Profits in the true sense should be measured by the increase or decline of cash balances.  The owners should become sensitive to cash changes and should measure the profitability of their business by actual cash flow and not by the accountants’ definition of profits.

Most financial statements include a statement of changes in cash balances.  This is usually skipped over with the major attention being given to the balance sheet and profit and loss statement.  The statement of cash flows should be reviewed carefully to see where the profits are being absorbed and what can be done to reverse downward trends in the cash balances.

At the end of the day, we accumulate and spend cash and its various iterations of liquid assets.  No matter how wealthy you are, happiness is created by a positive cash flow.

The title quote was by Frederick Adler.

One Comment leave one →
  1. 6hawthorne permalink
    August 13, 2015 8:39 pm


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