Having cash on hand is underrated, particularly in business

I've been self employed for quite some time, almost a decade, and for most of the time I didn't get anywhere near enough from my skills and experience.

The reason was a lack of available cash on hand. If I had cash I spent it, except for that needed to maintain a business.

With time I've learned that having (substantial) cash is extremely important if you are to actually make real money. It's about two things: being able to move quickly when opportunity arises and not being stuck in a month to month mindset.

The first is very underrated. I used to think it was about being creative or analytical and spotting the trend, but it isn't. It's about having cash to move when you see an opportunity. Bitcoin, Facebook stock, whatever. Naturally you need to have an edge in something, being smart or high openness or whatever, but without free capital to be a first mover, it doesn't matter.

Second, when you lack the cash, you're not thinking long term. You're thinking short term. What can you do to improve month to month, not year to year or decade to decade. It's so important to be able to make true strategic moves, not just hustling.

If I would advise myself from 10 years ago, I'd recommend myself to save up just 10-20K USD, before starting a business. I suppose this is common knowledge anyway, but with the whole digital nomad stuff, it is getting overlooked.
 

EndlessGravity

Woodpecker
it also means when your business gets hit, as every business will eventually, you can survive and survive longer. This is partially why I struggle to sympathize with business owners who are fighting after covid lockdowns. If you chose to operate on a shoe string you made your choice. Why should my tax money bail you out? Learn how to "business" better.
 

Leads

Robin
keep in mind that you can only fly internationally with 10k hard cash. There are reports however of internal US flights pulling Americans aside that have 6k on hand, then confiscating it....with no trace or reports being filed (so, stolen by airport security).

Either way, it will become trickier to travel with cash. Digging holes on ones own property is still a great option for a storage cache
 
What are your thoughts on becoming a homeowner vs. having a lot of cash on hand? The conventional wisdom is that becoming a homeowner is a good way to build wealth, because you can build up equity. On the other hand, if you have lots of cash on hand, that is money that can be put into a business.
 

paninaro

Kingfisher
What are your thoughts on becoming a homeowner vs. having a lot of cash on hand? The conventional wisdom is that becoming a homeowner is a good way to build wealth, because you can build up equity. On the other hand, if you have lots of cash on hand, that is money that can be put into a business.
It's a simple return on investment. Let's say you have $100k and your choice is buy a home that you'll sell in 5 years for $150k, or put $100k into a business. Your $100k will make you $50k if you buy the house. How much will you make over 5 years if you put it in a business instead? More than $50k? Usually you'll make more doing a business because a) higher risk = higher reward and b) anyone can buy a house, but not anyone has the expertise to start the business you plan to start..... unless it's a bad business idea or external factors lead to its failure.

(To finance people: I'm trying to be simple so I did not go into IRR; compounding; operating costs; leveraging; and WACC because that's just too complicated to explain.)
 

EndlessGravity

Woodpecker
It's a simple return on investment. Let's say you have $100k and your choice is buy a home that you'll sell in 5 years for $150k, or put $100k into a business. Your $100k will make you $50k if you buy the house. How much will you make over 5 years if you put it in a business instead? More than $50k? Usually you'll make more doing a business because a) higher risk = higher reward and b) anyone can buy a house, but not anyone has the expertise to start the business you plan to start..... unless it's a bad business idea or external factors lead to its failure.
No, so much comes down to this. I see idiots playing on Robinhood for what? A crappy gain on $500 bucks. A business can bring you in $40,000 annually to start off that $500 on year #1. Is there more risk? Maybe. Is it easy? No. But how is this even a choice?
 
It's a simple return on investment. Let's say you have $100k and your choice is buy a home that you'll sell in 5 years for $150k, or put $100k into a business. Your $100k will make you $50k if you buy the house. How much will you make over 5 years if you put it in a business instead? More than $50k? Usually you'll make more doing a business because a) higher risk = higher reward and b) anyone can buy a house, but not anyone has the expertise to start the business you plan to start..... unless it's a bad business idea or external factors lead to its failure.

(To finance people: I'm trying to be simple so I did not go into IRR; compounding; operating costs; leveraging; and WACC because that's just too complicated to explain.)
Maybe you make more than $50,000 by putting your money into a business. However, by putting that money into your business instead of into a down payment on a residence, this causes you to end up renting your residence, and after a few years of renting you're left with no equity. So it's not just $50k you're getting from buying that house. If you spent 5 years renting your house, after 5 years, you're left with nothing, instead of property worth $150K.
 

Dr. Howard

Peacock
Gold Member
Cash on hand is definitely under rated in business. The best way I've heard it said from one client I worked with is "I wanted to be my own bank". So, he sits on a large pile of cash. Sure, it doesn't earn much while it's sitting there but when he needs to act he can move very quickly, there is no bank involved or checking up on him etc.

Also, be careful with home ownership. Or, in another way, be frugal, buy a "Honda" vs. a "Porsche" house. If you go bigger/fancier your time and cost for maintenance and property taxes tend to really ramp up.
 
If I would advise myself from 10 years ago, I'd recommend myself to save up just 10-20K USD, before starting a business. I suppose this is common knowledge anyway, but with the whole digital nomad stuff, it is getting overlooked.
I can't second this enough, even for guys who are conventionally employed. If you live paycheck to paycheck, you get stuck doing whatever you have to to get the next paycheck. But if you've got the cash to get by for a while without a job, it's easy to walk away from a bad work environment.

A year of living expenses in the bank can mentally make the difference between freedom and slavery.
 

paninaro

Kingfisher
You get a 30 year fixed mortgage at all time rates w/ 20% down to avoid PMI and put the rest into a business.

Not either or; both.
As noted in my post, I ignored leveraging for simplicity. Indeed that should be considered, and cost of capital will vary between business vs personal loans.
 

paninaro

Kingfisher
Maybe you make more than $50,000 by putting your money into a business. However, by putting that money into your business instead of into a down payment on a residence, this causes you to end up renting your residence, and after a few years of renting you're left with no equity. So it's not just $50k you're getting from buying that house. If you spent 5 years renting your house, after 5 years, you're left with nothing, instead of property worth $150K.
This assumes you already have the residence. That's a whole different calculation then.
 
keep in mind that you can only fly internationally with 10k hard cash. There are reports however of internal US flights pulling Americans aside that have 6k on hand, then confiscating it....with no trace or reports being filed (so, stolen by airport security).

Either way, it will become trickier to travel with cash. Digging holes on ones own property is still a great option for a storage cache
Assuming the 10k limit is in the picture , travel with a friend , and make 2 trips , this is already 40k legally transported.
There is no way anyone will ask you where those 9999 EUR (for the EU) come from , as it is fully legal to travel with less than 10k.
 
I am earning an income an providing for my family solely based on having cash available to move on an opportunity and essentially I have found myself in a position where I am my own boss.

My first plan was to build back those cash reserves, which I have just done, to put myself back into a secure and confident position.

Cash flow and margin are two business fundamentals and cash flow seems to be ignored.
 
Use to work at a fairly small, family owned company. Made and sold exercise equipment, mainly to schools. They would always pay, but usually way past net 30. It does not matter what the accountant says the company is worth, if you have no cash in the bank you are broke. Sure, you can borrow short term from the bank, but debt at compound interest gets expensive.

Previously they always had lots of raw materials and were running out because they did not have the right stuff on hand. And they used to go ahead and work way ahead once they were set up to make something, you know, "to be efficient". After nearly going out of business, we aggressively cut down work in process and raw materials inventory. Just got organized about it (a home-made MRP system in Excel), we hardly ever ran out, but had little left over from working one order to the next. Never worked ahead more than a week--if we could not ship it out and bill it in two weeks, we did not start it. Any private companies paid C.O.D.--truck did not unload without the money in hand. Also redesigned products to be more modular, so a part from one thing would work for something else. Went from chrome plated items (1 week outsourcing) to doing stainless steel in-house that we could do the same day. Never missed the payroll, which was an accomplishment some months. That was 20 years ago, but that is how it is to survive.
 
Use to work at a fairly small, family owned company. Made and sold exercise equipment, mainly to schools. They would always pay, but usually way past net 30. It does not matter what the accountant says the company is worth, if you have no cash in the bank you are broke. Sure, you can borrow short term from the bank, but debt at compound interest gets expensive.

Previously they always had lots of raw materials and were running out because they did not have the right stuff on hand. And they used to go ahead and work way ahead once they were set up to make something, you know, "to be efficient". After nearly going out of business, we aggressively cut down work in process and raw materials inventory. Just got organized about it (a home-made MRP system in Excel), we hardly ever ran out, but had little left over from working one order to the next. Never worked ahead more than a week--if we could not ship it out and bill it in two weeks, we did not start it. Any private companies paid C.O.D.--truck did not unload without the money in hand. Also redesigned products to be more modular, so a part from one thing would work for something else. Went from chrome plated items (1 week outsourcing) to doing stainless steel in-house that we could do the same day. Never missed the payroll, which was an accomplishment some months. That was 20 years ago, but that is how it is to survive.
This is solid business advice. I am on the border between Gen X and Millennial, degree educated etc. and I had to learn this myself (and with some late guidance from my father). It is shocking how many companies are permanently on the edge of going bankrupt, and people too.

Learning this has lead me to be much more of an individualist as you really really can't rely on the system, even the military.
 
Use to work at a fairly small, family owned company. Made and sold exercise equipment, mainly to schools. They would always pay, but usually way past net 30. It does not matter what the accountant says the company is worth, if you have no cash in the bank you are broke. Sure, you can borrow short term from the bank, but debt at compound interest gets expensive.
I heard companies like McDonald's don't actually have cash in hand like that. Rather, they take a loan to purchase everything they need, run it through, process, make a profit on it, then pay off the loan with the revenue, rinse and repeat.

If so, then it means they're utterly controlled by the banks.
 

paninaro

Kingfisher
I heard companies like McDonald's don't actually have cash in hand like that. Rather, they take a loan to purchase everything they need, run it through, process, make a profit on it, then pay off the loan with the revenue, rinse and repeat.

If so, then it means they're utterly controlled by the banks.
Do you mean riding the float? Most suppliers invoice with Net 30 payment terms, and big companies like McDonalds probably negotiate it to Net 45 or Net 60. It means every time they receive an order, they have 45 days to come up with the cash to pay them. Even if they have the cash on hand, they can put it in short-term investments to make a bit of money and pay on the 45th day.

Or maybe you mean a line of credit. The interest rates on those usually don't make it worth it, but I imagine they negotiate pretty good rates too.
 
Do you mean riding the float? Most suppliers invoice with Net 30 payment terms, and big companies like McDonalds probably negotiate it to Net 45 or Net 60. It means every time they receive an order, they have 45 days to come up with the cash to pay them. Even if they have the cash on hand, they can put it in short-term investments to make a bit of money and pay on the 45th day.

Or maybe you mean a line of credit. The interest rates on those usually don't make it worth it, but I imagine they negotiate pretty good rates too.
I don't know about economics/financial things, and this is second/third hand. But I believe they meant a line of credit or loans.
 
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