What is cash?
They say that money makes the world go round, and we tend to agree that cash plays a big role in commerce and investing. Products and services are traded for cash, which is a medium of exchange that makes transactions faster and more convenient. Companies and businesses refer to cash not only as their reserves and coins but also to assets that can be easily converted to money.
For companies, cash reported does not necessarily mean just the money on hand and in their bank accounts, but also other assets that are easy to liquidate like checks or government bonds. For transactions between individuals and companies, cash is preferred due to its reliability and ease of use. There are little to no extra processes to confirm cash payments, unlike checks and credit cards which banks can decline.
Where does cash originate?
Thousands of years ago, people bartered or traded goods in order to survive. One hunter may have exchanged his freshly caught wild stag for one sack of grains from a farmer. Barter then evolved to trade, where ancient kingdoms allowed exchanges of goods for precious stones and metals.
Due to increased trade, some materials became more sought after owing to some unique characteristics. Parts of Africa and Asia used ivory as a means of exchange due to its beauty and strength. The Aztecs and Mayans used cacao beans as their “cash” due to cultural and economic reasons – it was a highly valued asset at the time.
The first recorded usage of physical coins come from the Lydians, whose descendants and geography can be traced to modern-day Turkey. Turkey has a very strategic location as a land route from Asia to Europe. This proximity at the center of Asia helped to spread the usage of coins which were fashioned from precious metals. Precious metals like gold and silver were used as cash due to their intrinsic value.
It was the Chinese that popularized the use of paper as currency, specifically as fiat currency. Fiat currencies are money that is used because of trust, not because of any value regarding the materials used. A piece of paper is not worth five cows, but if a kingdom or government declares that a piece of paper is worth one gold bar, which in turn has the value equivalent to five cows, then the paper bill is now worth five cows.
Cash, investing, and you
In making investments, you can see how strong a company is when they report their cash flow. However, the cash flow reported by companies does not constitute only the dollars in their bank accounts and physical inventory, but also other liquid assets. A liquid asset is a property that can easily be sold or converted to money. Liquid assets can be, but are not limited to:
- Government bonds, which are debts by the government that are easily bought or sold in a market.
- Money orders, which are documents that can be converted to cash and are already prepaid.
- Securities, which are financial instruments that prove ownership of a loan, a share or an interest in a company or other entities. These can be bought and sold in a stock market.
Just because a company reports a lot of cash does not necessarily mean that they can shell out that amount in a minute or two. Knowing what companies consider and report as cash can give you an insight as to how stable and robust a company is and can help you find a good company to invest.