Velocity of cash

cash flow, Financial Independence

Many years back I had read one book by Prof Ram Charan- Every Business is a Growth Business. Prof Ram Charan is one of the most well known gurus of multi billion dollar CEOs. I have mentioned his books earlier also.

In this book, that I mention above, he tells a story about how a lady in India , who is selling some items on the road and has a simple logic – she wants to sell of all the items that she has got to vend that day, even if she has to give a little discount for a larger quantity because then she can turn the cash around.

In business the equivalent logic is that profit and loss is on the balance sheet for record purposes, what matters is the ability for you to cycle the cash. If you can turn more cycles on your working capital you can generate much higher profits. Cash is real. Profits are only for the books. Companies close because they are not generating cash, not because they are not generating profit. A lot of people in business even now don’t understand the value of cash and hunt for Gross Margins. Gross Margins are important when you are giving a lot of credit because then if you are not even making margins then your business will crash.

Something which I am trying to wrap my arms around is that Cashflow is more important than Networth. I have been a big proponent for the magic of compounding and how it creates magic , the longer you let the money compound.

I have recently been reading a lot of books written by Garrett Gunderson and also following his YouTube channel. His emphasis is that Networth is like a P&L statement which has little significance if cash is not getting generated. His view is that assets which don’t generate regular cash are worthless. As per him the fundamental issue for generating financial independence is cash flow not net worth. I am always looking for ways that can help me figure out a quicker way to financial independence.

As per him like in a company if there’s a machinery and it’s generating products that generate cash for the company then this asset has value. A building which is lying vacant and not generating cash just sits on the balance sheet without creating any value. The value of the land on which the building is sitting may appreciate over time. But the cash which the machine is generating can keep multiplying depending on the velocity that it can generate.

So if I am making 10% margin on every $100 of product sold and I am able to cycle that cash 12 times in a year, then at the end of the year I would have made $120 dollars (a 120% return) while the $ that I invested in building the product are still with me. On the other hand the land lying idle will appreciate maybe 5-10% per annum.

While the above concept is clear to me, what I am trying to get a handle on, is that, for an individual oter than giving property on rent, what other methods exist to get the assets to create cash flow.

If you’ll have got personal assets other than property which is generating cash, I would like to hear from you. Pls put in the comments below

Till next time then.

Carpe Diem!!!