In every language, cash flow represents the same thing: survival. Cash flow is an irreducible component of personal and professional success and requires imaginative planning to protect its fluidity.
The new model of financial planning places cash flow in a position of priority above all else. It seems obvious, but many investors never took the time to fully analyze what would happen if the market took a sharp 50% downturn, how this would adversely affect their cash flow, and the negative financial consequences to follow.
The recent market cycle, if nothing else, has been a graduate course in the importance of scenario planning. Historically, nervous investors have been advised to invest in “blue chip” dividend paying companies as a source of dependable, quarterly cash flow. These investors have learned everything works until it doesn’t.
Dividend investors who depended on quarterly payments for cash flow have had their systems shocked. Standard & Poor’s estimates a drop of $53 billion in dividend payments for 2009. GE, an aristocrat among dividend paying companies, cut their quarterly payments to $0.10 from $0.31 in the first quarter of 2009. An institutional investor who owned 1 million shares of GE would expect a quarterly dividend equal to 1 million x $0.31 or $310,000. In 2009, this investor would have received only $100,000, a passive cash flow loss of $210,000.
Planning for cash flow interruption is critical.
The old model for financial planning had more to do with fitting clients into pre-determined models. Models that said put this much in bonds, this much in equities, and on and on. This does not work. Once your financial plan truly mirrors your life plan things look very differently. No longer does the ebb and flow of market activity determine whether you will be able to achieve your dreams and aspirations. The market becomes only one of multiple sources of cash flow, none of which alone can upset the apple cart.
Cash is still king; take care of its throne.