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The other side of the cash flow game is that you can be cash flow positive most of the time... but go out of business if you face occasional, large often compli
by d_e_solomon 4y ago
The other side of the cash flow game is that you can be cash flow positive most of the time... but go out of business if you face occasional, large often complicated fixed costs. A robust accounting and pricing model is needed to plan for those fixed costs. It's like picking up pennies in front of a steamrolller if you only focus on short term cash flow.
The other interesting example of cash flow games is Warren Buffet's focus on insurance. He really likes picking up people's premium payments and collecting interest on them until the claims hit. My limited understanding is that Buffet looks for those situations specifically.
- scrappyjoe 4y agoBuffet uses the held premiums - called _float_ - to invest in assets which generate a higher than required return for the eventual insurance claims. The way he sees it, the float is an interest free loan that you never have to pay back, as long as your incoming premiums each year are roughly equivalent to your outgoing claims each year. His strategy is to use this interest free loan to generate as high a return as possible, which he can then cream off the top for shareholders.
- kqr 4y agoBut it's only possible when you're well-capitalised and not as dependent on cash flows. See also the Kelly criterion, which makes it logical for one actor to offer and another to pay for insurance, despite the fact that both sides cannot have positive EV.
- robocat 4y ago> despite the fact that both sides cannot have positive EV Maybe for the thing insured, but dependencies can cause ripple effect costs which can be very high, so both sides can have positive EV when considering the whole (not just the insurance). I think you are assuming all transactions are zero-sum? Not something I know much about, so quite probably I just misunderstand your comment.