The author of ‘Practical Steps to Financial
Freedom and Independence,’ Usiere Uko,
writes about why you need to invest for
cash flow
Most people tend to think that when you
are rich, you have a lot of money. They
judge by outward appearances. Many also
believe that when you get to a certain
level of affluence, you no longer have
money problems. You can look rich –
drive flashy cars, own houses and be
worth hundreds of millions, but be broke
and struggle to pay your bills or your
children’s school fees. Many people look
rich but, behind the scenes, once in a
while they shake out their trouser pockets
in the wardrobe and look under cushions
for money to buy petrol for their car or
other necessities. People like this are
referred to as asset rich, cash poor. They
do not have enough cash. They are living
life on the financial edge – if problem
strikes, they will have to borrow or sell
something to bale themselves out.
Cash flow versus capital gain
Most people look for capital gain when it
comes to investing – buy low and sell
high, which is well and good. The
challenge is; what happens between the
period of buying and selling which can be
in years? Basically, hope and pray while
the item lies fallow rather than generate
income. Net worth is calculated based on
estimated value rather than actual cash
flow, hence one can be rich and still be
broke, worth millions but, at the same
time, contending with due bills. A minor
financial crisis can cause one to dispose
of their assets at a giveaway price because
they need the money urgently.
Negotiating property price with an owner
who desperately needs the money is every
buyers dream. When they sense the
desperation, they lower their bid. They
buyer calls the shots.
Cash flow is the lifeblood of every
business and personal finance. The
moment a company runs out of cash, it is
headed for bankruptcy despite projected
earnings and profits for that year. You get
to hear about terms like “paper profits”,
profits not backed by money in the bank.
The moment the company cannot make
payroll, pay its suppliers and catch up
loan repayment, it is gradually going out
of business. In mergers and acquisitions,
the cash rich partner dictates the terms.
You find seemingly smaller companies
acquiring bigger companies or becoming
the senior partner in a merger. It is a
matter of cash. A seemingly smaller Exxon
became the senior partner in the
ExxonMobil merger, although Mobil had a
much larger inventory of facilities. Here in
Nigeria, a seemingly small Standard Trust
Bank became the senior partner in the
merger that produced the new UBA,
though the old UBA was bigger in terms of
number of branches and customer base.
It also holds true for individuals. When
you are cash strapped, you negotiate
from a position of weakness. He who has
the gold makes the rules.
Expert opinions
How much is your property (house, car,
etc.) worth? The answer is often an expert
opinion. Until the sale is closed, it
remains an opinion, which is often on the
high side (to make you feel good). You
often get much less. The wise investor
invests for cash flow while the poor and
middle class investors invest for capital
gain. They focus more on what they have
control over – cash flow. Capital gain
follows naturally. More often than not,
capital gain is outside your control.
Capital gain is driven by market
sentiments rather than fundamentals.
Your broker can tell you to buy this stock
or property now and it will double in
price in such and such a time. The broker
is just expressing an opinion, not stating
a fact. You can buy based on that
opinion, and when it turns out to be
wrong, you cannot get your money back.
In the real estate market, the true value
of your property is the best offer a buyer
is ready to pay. Until you see the colour
of the money, you cannot say for sure
what your property is worth. Even in the
stock market where published stock prices
are not opinions like the real estate
market, a stock may be this price today,
but the moment you ask your broker to
sell, the price may drop at the point of
executing that order. You can feel on top
of the world that you are worth this
much, but the moment of truth comes
when you actually convert your items to
cash. For household items, the rule of
thumb is to assume it is worth 10 per
cent of purchase price. This is one of the
key reasons why net worth is not a true
indicator of your financial health. The
value you put on your item is an opinion.
When you invest for capital gain, you are
investing based on opinions, not facts.
The price movement is not under your
control. You can only hope and pray that
the market sentiment favours your
projections. Your financial plan is based
on hope that the opinion turns out to be
correct
Cash flow is king
Despite the advances in technology and
going cashless globally, the world still
runs on cash. You need cash every single
day, either yours or borrowed funds. This
is why it is critical that your investment
generates cash flow (income). Investing is
about control. This includes control when
you buy and sell. When you sell because
you need the money (due to lack of cash
flow), you don’t have control – you simply
grab the best offer, sometimes amidst
much pleading for the buyer to up their
offer. You may bluff, but you always
come back to the table because you have
no options.
When you focus on investing for cash
flow, you have control over when you exit
the investment. You negotiate from a
position of strength. If the price is not
right, you can afford to walk away and
wait. While waiting, you still enjoy the
cash flow from the asset.
Buying and selling looks attractive in the
short term, but if you look at the Forbes
Rich List, very few, if any made it there by
buying and selling. They own assets that
generate cash flow. Donald Trump is
known for real estate among other things,
and much of his wealth comes from real
estate holdings. When you keep jumping
from property to property (flipping
property as it is called), you may make a
lot of money in the short term, but 20
years down the line, you may have
nothing to show, because the money you
made went in directions you cannot
account for. If you want to become a
flipper, you still need a solid base to flip
from, or you may find yourself back to
ground zero after a deal gone wrong.
As you gather ‘assets’, look critically at the
cash flow component. Don’t tie down
your money without generating income.
Invest for cash flow. If you run low on
cash, you are putting yourself in a
financially weak position and may be
forced to sell. You can be rich and go
broke. Cash flow is king. Do not run out
of cash.

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