Cash-Flow is King
If you don’t have a plan to maintain Cash Flow at all times, you are leaving yourself open to a potential catastrophe.
Cash creates flexibility and flexibility enables you to address unforeseen circumstances while also affording you the ability to take advantage of investment opportunities when they present themselves. Expecially those that come up when others need to sell assets in a hurry to maintain their own cash flow…
Can you smell a “Fire Sale!?”
In this post, I am going to discuss what exactly cash-flow is, some ways to plan for it AND an example of how two auto companies, Ford and GM, planned for for their own cash flows so you can see how you might model their success.
What Exactly is Cash-Flow
Cash flow is the transfer of cash, both in and out, of an economic entity, like a business or a home’s personal finances. A lot of people think cash flow is created by just generating income. However, cash flow is affected by “investing activities” (when you buy an asset, you experience negative cash flow, and when you sell an asset, you experience positive cash flow) and “financing activities (when you borrow money, you have positive cash flow but when you pay it back, you have negative cash flow.)
Where people get into financial trouble is when they are responsible for more cash outlays then they have cash available to satisfy them. Therefore, having sources of cash to pull from is an important consideration when developing a financial plan. This may mean having several years of expenses set aside in cash and insurance to indemnify you if you suffer a covered financial loss.
As a planner, I’ve worked with many high-net-worth clients who are “asset-rich but cash poor,” so we look at ways to create cash reserves without impacting profitability. Often, that involves extracting equity from the assets (taking out a loan and using the asset as collateral) when they have the option available. Of course, a big pushback to doing this is the cost of the loan. After all, a lender isn’t just going to lend you cash for free. They are going to expect compensation for lending that money. Therefore, we find ways to earn an equivalent return to offset that cost. This is identified through a process because you don’t want to put this cash at risk or you defeat the purpose. More on that later.
So how important can this cash reserve be? Let me share the story of Ford and General Motors and how they did during “The Great Recession” of 2008.
How Cash-Flow Planning Impacted The Auto Industry During "The Great Recession"
In 2006, before what has historically been called ‘The Great Recession” of 2008, when the financial system collapsed, both Ford and GM had lots of assets, and OK cash flow but needed to make improvements to increase their profitability.
GM’s management reviewed its financial statement in 2006 and decided to maintain the status quo. They believed they would be OK if everything went as planned.
On the other hand, Ford’s leadership did something completely against what most think would be rational. They took out loans against every asset the company owned to create a gigantic pile of CASH of $20.6 Billion Dollars.
Ford mortgaged their buildings, patents, and even the iconic Ford logo to generate all that cash.
How do you feel about taking loans against your assets to generate cash? Would you do it? After all, the status quo way of thinking says, “debt is bad,” and you should avoid it but I am going to show you what Mulally did was a GENIOUS MOVE and a way you can learn how to duplicate it.
First, let me ask…
When will banks lend you money? When you don’t need it but want it, right? Really, they lend it to you when they have it, and they believe you are in a position to pay it back. If you are desperate, lenders will avoid you…they won’t give you a loan.
In 2006 interest rates were low, and money was easy to get. So the CEO of Ford, a guy named Mulally, took advantage of the opportunity to extract equity from the company’s assets.
Second, Mulally saw the company was generating OK cash flow, but they were losing money, so they needed to rearrange how they did business to get back on track. That required investment and some risk. He was smart because he didn’t assume the economic environment would stay the same as in 2006. Do you remember 2006? Everyone and anybody could get loans. People were getting loans worth 100% of a property’s value without having to show any proof of income to get that money. So Ford took advantage of this economic environment, not to try and buy more assets but instead to be prepared for a time when there could be an economic downturn when cash wouldn’t be easy to get. This is completely opposite of what GM managers did. Mulally understood that if the economy slowed down, sales and cash flow would decrease, and that type of stress could bankrupt the business if they didn’t have access to cash to make the difference. So to prepare, he extracted equity from all the company’s assets when he had the option to do so.
Thirdly, turning the equity into cash put Ford in control of its future.
Now, Fast forward to The Great Recession.
As you probably know, GM ran out of cash and was taken over by United States Government. There was no way for them to take loans because nobody had money to lend. The “shark lenders” at the Federal government took over ownership of the company. As a matter of fact, for a while, people were calling GM “Government Motors” instead of General Motors to play on those initials.
Making it worse, every shareowner of GM lost the entirety of their investment. The company was effectively bankrupt, and the government took over to save the auto industry.
I had one friend in Orlando whose father willed her over $1 Million dollars in GM shares when died….she lost it all!
On the other hand, Ford was flush with cash. Even though sales slowed and operating cash flow dried up, they had all that cash they had generated a few years earlier, giving them the resources needed to pay their bills and continue making their improvements. They didn’t wait until the last minute, so they never asked the government FOR A DIME. As a result, their stock has increased in the years since the recession, while all the shareholders of GM at that time lost everything.
For his leadership, Mullally was named Person of the Year by the Financial Times “Boldness in Business Awards” in 2011…
The CEO of GM was fired.
What Ford and GM can teach YOU about cash-flow planning...
So you might be wondering, “How does this relate to you?”
Like it or not, YOU are the CEO of YOU Inc. Do you have illiquid assets like your home or business? Do you have a line of credit on them? If you do have a line of credit, do you know if the bank can take that line away from you for any reason? A line of credit isn’t the same as having cash in hand.
Knowing this, do you have the cash to handle one year – two years, or even three years of expenses if something out of your control happens in your life, or would an event like that ruin you financially? CASH IS KING for a reason…
Here is my opinion, which I have formed from experience and observation…
A lot of people are asset-rich and cash poor. They have been taught that the key to success is to make every dollar go to work for them to make more money, and, for goodness’ sake, they are taught to pay down debt and do anything they can to stop paying interest.
Is that what you have been led to believe?
I am here to tell you that is exactly the type of thinking that puts people in a position where others WHO THINK LIKE MULALLY AND FORD can come in and take everything from you when things don’t go as planned.
Yes, assets are important, and cutting expenses is important too. Still, the key to success is having assets AND cash IN HAND so you make money while maintaining flexibility and control. The last thing you want is to find yourself in a position where you can’t respond and have to beg for a loan or fire sale your assets because when this happens, you leave yourself open to suffering the fate of General Motors and losing what you worked so hard to create.
How many people do you know have had something like that happen to them?
Financial success isn’t common because the common way of thinking isn’t designed to help people succeed. Well, I mean, it will help you succeed if everything goes AS Planned, but you are smart enough to know that isn’t always going to be the case. There are always things that are messed up… Therefore, you want to be positioned so that if you experience financial stress, you can emerge from the experience stronger than before that stress started.
Like I like to say, don’t be the glass that shatters when it is put under stress, be the bodybuilder who comes out stronger when they experience stress.
To know the right way to do this, you need to understand the rules and understand how to use them to your advantage. This is done through a system like the kind I do in my Wealth Manifestation Process.
My hope for you is that you are always in a position to succeed no matter what happens in your life or in the general economy. Sometimes, you need a unique perspective that challenges common thinking. After all, if common sense thinking is so good, why is it so hard to do, and why isn’t everyone financially successful?
I hope this article served you. Be sure to subscribe to all my social media challenges, and remember, the decisions you make today will manifest the life you desire.
Oh, and by the way, if you would like to learn more about the Wealth Manifestation Process, you can go to https://www.kevinwenke.com/wealth-manifestation-process and learn all about it and how it can help you reach financial success.