Is cash really king?

It still amazes me how many investors and developers scrap around for cash last minute in order to seize an opportunity and complete on a transaction. It causes fear, panic and emotional decisions that don't always work out for the best - overpaying for land is the best example.

It's fully understandable that opportunities arise at the eleventh-hour and cash is not always readily available. Well, what if it could be with more planning? In answer to my own question, it can.

These points may seem basic to individuals working in finance but we have to remember this is what we do day in, day out. So if it's common sense then why doesn't every investor and developer adopt these principles? It's not rocket science. If you have been operating a successful development business in a similar fashion over the past 10 years, it won't necessarily change over night.

The one fundamental difference now is many 'younger' developers didn't feel the last financial crash or experience soaring inflation. It's now 9.1% - far beyond the Bank of England's 2% target rate. Personally, I was insulated by the British Army and felt zero impact whatsoever. In actual fact, I remembering wondering why so many people were queuing up outside Northern Rock on Bromley High Street. Still slightly embarrassed actually at my naivety. To be fair Wetherspoons was still open so every cloud...

A few common points to ponder on:

1. Increased leverage. Granted, clearing banks overall cost of finance is pretty cheap but how much equity are you actually injecting? A lot is the simple answer. There are good lenders that can fund higher leverage, slightly increased margins but equate to less equity being injected day one. The overall cost of finance is slightly more expensive but you have more cash in the bank and the ROE make more financial sense. With more cash in the bank there is less room for opportunity loss or running the risk of scrapping around for cash last minute.
2. Rental portfolio. Is there room to release equity and create more liquidity?
3. Equity partners. "You can never have enough equity providers". I completely stand by this because there is always room for more HNW individuals and family office equity partners. Some developers work on utilising third party equity and keep their own cash in the bank. They're giving away 50% of the profits to afford the luxury in all fairness.
4. Analysing supply chains. I was on site with a particular developer that had been using a kitchen company for the past 15 years that were based locally with 6 week waiting time. One phone call to a firm in the North translated to a delivery the following week and a slightly reduced cost! It's amazing what one phone call can achieve.

With expensive land, increased build costs, a labour shortage, soaring inflation and a looming recession. Liquidity and more cash in the bank surely makes sense to combat unforeseen cost overruns or to simply seize opportunities that arise when others fail?

Ray Dalio believes "cash is still trash". Well, unless you're worth $22,000,000,000 and you're an SME developer, then cash is pretty important.

"Cash is king in uncertain times".