King Cash Flows
Cash Flows Rule Everything Around Me
In an unconventional place, one can learn the significance of cash flow as the most important accounting metric. In 1993, Wu-Tang Clan came out with the hit C.R.E.A.M.
Cash rules everything around me
A business operates in a similar fashion to a rapper. They produce (production), they perform (services), and receive money for their work, cash flow.
On the opposite side of the ledger, they buy equipment and machinery (lavish automobiles), pay for employees (security, video girls), and deduct business expenses (Hennesy, creativity enhancers).
Cash flow has been the death of many businesses (Silicon Valley Bank, Bernie Madoff, 50-Cent) and comes in the blow of bankruptcy. Without cash to fund operations and lifestyles, the producer gets over their skies and is unable to afford their obligations.
In rap videos, you may see young entrepreneurs touting diamonds or rental supercars; these are depreciating assets, practically illiquid liabilities. As cash is required to maintain a status, less is available for reinvestment into the business, and when cash is required in times of necessity, there is none available. This shortage requires the business to liquidate their bling for pennies on the dollar or declare bankruptcy, unable to pay back its creditors.
In an economy, every major recession or scare stems from a cash flow (liquidity) crisis. Yes, the bad debt or overextension is a hindrance, however, it does not become an issue until there the (lack of) liquidity forces a fire sale to raise capital.
Today, the Federal Reserve has prolonged our liquidity issues by directly funding businesses with bad debt in need of cash. This began in 2009 after the recession with Quantitative Easing (QE1) and has continued through today, with $20B being printed and injected weekly.
This continued influx has been a crutch for what’s known as “Zombie Corporations”, those that are inefficient and non-productive in society. They feed off of free money and accounting ruses to stay afloat, draining the overall market.
Today, Cash Still Rules Everything Around Us; however, the faux creation of cash has distorted balances, allowing receivers to artificially stay alive, at the expense of inflation for you and me.