What is Cash?
Most people think of cash as physical currency, such as coins or bills, but in the world of finance, cash usually refers to money plus anything that a business can quickly convert to cash.
Cash is the physical currency that people use to make transactions every day. Cash includes coins and bills but also consists of the money in your bank account that you access by swiping your debit card at a store. For businesses, cash is any money that they have on hand to pay for expenses and debts — including physical currency and funds in bank accounts. Even though most people think of cash as paper money, it actually refers to electronic forms of currency as well.
Imagine that a small convenience store wants to count all of the cash that it has available to purchase new inventory. To find the store’s cash balance, the owner starts by counting all of the coins and bills in the cash register. They then add the value of any checks customers used to pay for purchases. Next, they include the balance of the company’s checking and savings accounts. The sum of all these numbers is the business’s total cash balance.
Cash is almost anything that you could give your friend to pay them back when they pay for your meal at a restaurant…
When you go out to eat with friends, sometimes it’s easier for one person to pay for the bill and have everyone pay them back. Cash is something you could use to repay your friend quickly and with no fee. You might hand her a $20 bill to cover your part of the meal, but you could just as easily use an app to send an electronic transfer from your bank account. You could even pay her back with a check if you wanted to.
When you think about cash, you probably think about physical currency. Paper bills and metal coins are two of the most commonly used forms of money, but there are other types of cash that people and businesses use. In the world of finance, cash includes physical currency, bank account balances, and even checks that the company hasn’t cashed yet.
Most businesses track their cash accounts because having that access is essential. Without money, a company can’t pay its suppliers or its employees. Companies also keep track of their cash equivalents. These items aren’t cash, but could easily be converted into cash. If a business needs to pay a bill or meet another obligation, these assets can quickly be liquidated.
Cash equivalents are things that people or businesses can easily and quickly convert to cash when needed.
Things like short-term bonds, treasury bills, and the balance of a money market fund are cash equivalents.
For stocks, the holder can quickly sell them to another buyer on the stock market and receive almost immediate payment. If a business holds shares and needs to make a debt payment, it can sell the stock to finance the debt payment without trouble.
Treasury bills are similar, with maturity lengths of just four, 13, or 26 weeks. If a business needs cash quickly, it typically only has to wait a few weeks to receive the value of the bill, or it can sell it to another buyer right away.
The important thing about cash equivalents is that you can sell them quickly and without much cost. Selling real estate, on the other hand, takes a long time and usually incurs transaction fees, so real estate doesn’t count as a cash equivalent.
Humans have used physical currency for millennia with the exact system of creation and exchange evolving as technology and economies change.
Before cash, most societies used a barter system. One farmer would exchange grain for another’s vegetables. Without currency, both parties in a transaction needed to have a good the other wanted — making transactions quite inefficient.
The barter system eventually gave way to a system called commodity money. One widely desired good that almost everyone needs and uses became the de facto currency for an area. For example, salt, tea, and tobacco were all used as commodity money at one point in history.
The downside of commodity money is that it can be difficult to transport large amounts at once. Products that could spoil posed issues for long-term storage of value.
The first physical currencies were made of metal. Metal is easy to work with, relatively easy to find, and can be melted down and recycled. It was a practical method for physical currencies. Evidence points to societies using coins as far back as 5,000 B.C.
The first known example of physical money in the western world comes from Lydia (now modern-day Turkey). Archaeologists discovered a coin featuring a lion and dated it to the 700s B.C. The earliest widespread examples of paper money come from China around 960 A.D.
In the early days of paper and metal money, the money served as a representative currency. The coins or bills stood for a valuable commodity, and the holder had the option of redeeming their currency for that commodity. For example, people could redeem the British pound sterling for a pound of silver. One of the most common standards for representative money was the gold standard.
Fiat money eventually replaced representative currency as the most commonly used form of cash. The United States left the gold standard in 1971 and most of the world followed suit. Today, you can’t convert fiat currency into an equivalent commodity. Instead, fiat currency has value simply because people agree that it does.
Many cash transactions now happen electronically either through electronic transfer or debit card.
As electronic payment methods have gained popularity, many people question whether the economy is evolving to the point that physical cash (ie, bills and coins) may become obsolete.
Real money does have inherent flaws. It can be hard or dangerous to transfer large amounts of it at a time, and it can be difficult to trace. Electronic transfers can happen instantly, leave a paper trail, and don’t require the transportation of bills and coins. Even using a debit or credit card is often easier than dealing with physical money. However, some electronic transfer methods charge fees or take a few days to complete, giving them a cost compared to handing someone cash.
Cash will probably hang around for a long time. Physical bills and coins are the most commonly used payment method for many people. More than seven million Americans don’t have a bank account or credit card, making cash their only option for conducting financial transactions.
Another advantage is that cash is immune to identity theft. If your identity is stolen, it can take months to recover and get access to your credit cards and electronic transfer methods. But you can continue using cash even if someone steals your identity.
The question of whether we should keep using physical cash is mostly a personal one. For some people, going completely cashless makes their financial life much more straightforward. For others, using money makes budgeting and daily spending easier.
If you only shop at stores that accept cards or other types of electronic transfers and have friends who use peer-to-peer transfer apps, then a cashless life might work for you. But if you live somewhere where many businesses only accept cash or have friends who prefer to use cash to settle up after a night out, you’ll have to keep using cash.
Societally, using cash and going cashless both have pros and cons. A cashless society doesn’t need to bear the costs of printing physical currency or running the industries related to physical currency, such as stocking ATMs and providing security for large cash transfers.
On the other hand, cashless societies make it more difficult for people to make transactions with privacy and can leave people who don’t have access to banks without the opportunity to participate in large swaths of the economy.
One scenario in which people frequently consider using cash is when they make a large purchase. For example, someone buying a car may debate between paying for the vehicle or financing it.
If you can’t afford to pay cash for a purchase, then financing may be your only option. When you do have enough money to pay for something in cash, you should still think about the pros and cons.
One benefit of paying in cash is that you don’t have to worry about taking on new debt and making a payment (with interest added to your principal) every month. Using cash also won’t impact your credit score.
Many businesses also offer cash discounts. Ask whether you can get a discount on the final price if you make your purchase with cash.
On the other hand, financing means you don’t have to part with all of your money upfront. If the interest rate for the loan is low, you could come out ahead by financing. For example, if you finance a new car at a 3% interest rate and invest the cash you would have paid with, earning a 4% return, you’ll get more in returns than you’ll lose in interest payments.
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