A new management paradigm - conserve cash

What we are experiencing now might be a new paradigm for successful management.

Only a year ago, companies that jealously hoarded cash were viewed with suspicion, even those as secure as Microsoft! To be a successful manager, it was thought, was to pay out significant dividends or to buy back shares. Thus the commercial paper market became popular with businesses borrowing to satisfy these conventions of the old paradigm. Then, late last year, the commercial paper market closed overnight which began a frantic scramble for cash to pay staff…etc. Since then, companies have sought to scramble together all the cash that they can and spending less in the process. Pressures from investors inquiring about the durability of the businesses cash flow at current “burn rates” has now replaced those of whining for greater dividend payments.

Some cash hoarders are now taking advantage of their reservoirs of stored up cash to buy up their supply chains, competitors or conglomerates at low prices. $71 of foreign acquisitions have come from Japanese companies last year alone and many Indian conglomerates are buying up in a similar vein. Microsoft is sitting on a $21 billion hoard and now has a lot of options with Bill Gates’ prediction that the firm can last a year with zero sales. These firms are the true winners of the current climate.

Thus companies have entered a new mindset: thrift is good. And in many respects this is true. However, thrift is only good until everyone does it, or what Keynes calls “the paradox of thrift”. If everyone stops spending and decides to hoard cash, nobody wins and the economy will slow down even more. The real issue for firms now will be finding a balance. While holding some cash in the bank will be vital, so too will be cut backs in the right areas and in the right way. frugal investing and spending must replace the current frozen markets soon or else the situation will become a lot worse.

Here’s a great link from the economist about this issue: