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. Another source of cash is savings from your employment income. Cash flow is the third major source of cash – it is cash generated from your business(es) and investments.

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 Kyosaki 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.

The second source of cash flow is your investments and here one must be careful as well. REIN’s Real Estate Investors are not necessarily investors. Even 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 investments: buying and selling properties (investments) and rental and other operations related to the investment properties (the business).

Cash from rental and other real estate operations minus operational expenses minus financing payments is cash flow. Dividends, return of capital, distributions and interest minus investment account charges, legal fees, accounting fees, interest payments etcetera is cash flow from investments.

Cash is an investment asset, just like real estate or stocks. Cash flow represents your incoming and outgoing cash. 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 more investments. So, the saying “Cash is King” is not entirely correct, in my eyes it should be “Cash Flow is King”

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