Monday, February 22, 2010

Cash and Cash flow

There is an important distinction between having cash and having cash flow. Cash is created when selling investments. Cash flow is generated from operating our assets. Cash flow produced as savings from your employment income. Cash flow is also generated from your business(es) and from your investment operations

Running a business is entirely different from investing – a whole different blog topic (there are soooo many!). Suffices to say, ‘a good business man is not necessarily a good investor’. Up to recently, you could consider Robert Kiyosaki to be a good business man, but I am not sure he is that good of an investor – no matter the opinions of all his fans. Having said that, a successful business operation produces positive cash flow

Other sources of cash flow are your investments and here one must be careful as well. REIN’s Real Estate ‘investors’ are not necessarily investors but rather business operators. Don Campbell states that REIN members should see their real estate investments ‘as a business’. This is because there are two components involved with real estate investment: buying and selling properties (investments) and rental and other income minus expenses from operations related to the properties.

1.     Cash flow from real estate is: income from rental and other real estate operations (e.g. laundry or parking fees) minus operational expenses minus financing payments.
2.     Cash flow from investments are dividend, return of capital, distributions and interest minus investment account charges, minus legal fees, accounting fees, interest payments etcetera.

Cash is an investment asset, just like real estate or stocks. Cash flow represents your incoming and outgoing cash from operations. If your operations are profitable then you have positive cash flow. During bad times you don’t sell investments in a panic – that is the sure way to unrecoverable losses. Instead, a strong positive cash flow will help build your cash position together with the profits you made when you sold excessively overvalued assets in the preceding ‘boom’. Cash flow is adding to your emergency funds and provides funds for further investment. So, the saying “Cash is King” is not entirely correct, in my eyes it should be “Cash Flow is King”

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