“…and always remember, cash is king.” It is one the favorite quote of my finance professor from business school. He taught how hard it is to hide cash than to hide profits, and so he would devote more time to analyze cash flow statements than other part of the financial statements. His opinion is that good stable growth companies have one or more “cash cows” that yield steady multiple sources of revenue, much of which is in turn invested to “farm” new cash cows. It makes sense a lot, doesn’t it? But then we would go over dozens of case studies where company after company made the cardinal sin of of not investing in future growth, and within years, they become obsolete. Especially those in IT, even the mighty ones.
Almost all of us — either by social conditioning or otherwise — build our first source of income, our own personal “cash cow”: us. We go through many years of schooling and many layers of education that we hope provide the ability to get our first source of income, which happens to be our primary source of income and in many cases, our only source of income. The asset is us, which we built through our skill and/or sweat equity. Good stable growing individuals will continue to use the cash generated to build more assets that provide adequate cash, hopefully, to make them “cash independent” in the near future.
So if you are on path to your financial freedom, you need to understand what your “cash cows” are, if and when would it be enough to cover your expenses, and it’s cash flow stability or volatility during the course of your financial independence. The best asset you have now is time, doesn’t matter whether you are 20, 30, 40 or 50, you are always younger today then you will be tomorrow. So spend some time and thought on how to make yourself stable and valuable so that you have the option of investing to generate your “cash cows”. All assets are not created equal. Similarly, the cost of the asset doesn’t always reflect the magnitude of it’s cash generating potential. It so happens that in the modern day world, we are more focused on disposable assets that have little or no residual value, robbing us of creating more avenues to generate our “cash cows”.
Cash-flow Volatility
As I mentioned in the previous post, as asset provides us with the possibility to generate cash; it is up to us to convert the possibility into reality. To simply put, everything we own is an asset. My laptop, books, kitchenware and my wardrobe. And so are my investments and rentals. But guess which ones generate cash. Also, different types of assets are affected by different market factors. At the end of the day, all you should be worried about how risky or volatile your cash flows are so that you just don’t have to wake up one day and have your money go “poof” (hello 2008!). Even the hard cash you have in your hand or bank — the supposedly end product of all your investment ventures — is still volatile, as it is affected by inflation. There is no hard and fast rule to fix your volatility. Some like to create a stable foundation first before moving on to risky ventures. Some like to start with high risk/reward ventures. There is no “one glove fits all” approach here, and it shouldn’t be; we are all different and unique!
The Bronze Alchemist 