Friday, March 28, 2014

Cash Flow & Liquidity

I explained to the boys the concepts of cash flow and liquidity. These concepts are relevant to organizations as well as individuals. You might be "profitable", have more income than expenses, but if the timing of your expenses is sooner than that of your income, you might run out of cash and get into a lot of trouble. This, I believe, is the primary reason start-ups fail.

You might have valuable assets, but if they are illiquid they might do you no good when you need cash. A house might take weeks or months to sell; a company might take months, years or never find a buyer. Often there is a trade-off between speed and value: a car can always be sold quickly at a dealer, but for less than a private buyer, who might take weeks to find, would pay.

Understand these concepts and keep an eye on them for your personal and professional lives.

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