The most important thing to a business

Can you guess what is the most important thing to a business? The answer, my friend, is Cash. Without it, a business would not be solvent, and it is one of the most concrete thing about businesses that no investor can be wrong about. Cash is hard cold cash, and there's nothing dodgey about it. It seldom gets stolen as it is almost always in the bank and is guaranteed.

A business' assets and liabilities can be classified into current and non-current. The current assets and liabilities run the business within a 12 month-view operating period. Current assets always have to be more than current liabilities is the business is to remain solvent. The meaning of solvent is the ability of a business to repay all its current debts with current assets. Current debts are debts due within 12 months time.

Hence, Cash is a very useful tool to repay all current debts. When a customer contributes revenue to a business, it can either choose to settle the transaction via cash or credit. If a customer pays by credit, the cash is only received usually around 30 days later. Because of that a cash customer is more valuable than a credit customer. That is why we see many shops offer discounts when a customer pays by cash, because they would rather have Cash at the moment than to wait for 30 days for a credit customer to pay up.

When we buy a business, the only thing we can be 100% sure of is Cash. If a share costs $25, and it has a backing of Net Cash of $16, we can be assured that we're buying the rest of the assets of the business for just $9. By Net Cash I mean Cash less current debt and non-current debt. Cashflow is also very important to a business.

We can find useful information from the Statement of Cashflows of the business. This particular financial statement is the most hardest to manipulate and indeed is most valuable to an investor. It tells us how much the business is paying for a new investment, where it is getting the funds from, either from operating activities, sale of investments or from share issues. It also shows their cash management and whether it has a strong cashflow or not.

Overall, if a business has cash it is unlikely to go into liquidation anytime soon. Things will happen if a business has a net cash position, or favourably a no debt position. This is what i personally prefer, as I've been brought up with the thought in my mind that 'debt is evil, debt is bad'.

No need to imagine/predict what the business will do to remain solvent if it has cash in its hand.