When Cash Isn't King

When Cash Isn't KingIn times of economic uncertainty, it’s wise to “store nuts”, as an entrepreneur friend of mine says. There’s no question that U.S. companies are doing just that, with nearly two trillion dollars in earnings sitting on the sidelines.

But be careful. Commenting on the competing interests of management and shareholders, legendary value investor Benjamin Graham once said, “The more dubious the company’s prospects…the more anxious management is to retain all the cash it can in the business” (as opposed to distributing it to shareholders). Turning the phrase around may be equally telling: “the more anxious management is to retain all the cash it can in the business, the more dubious the company’s prospects.”

That well describes the Loss of Nerve principle turned up by my research. As I explain in When Growth Stalls, it’s one of four destructive internal dynamics that take–and keep–struggling companies down. If your company is retaining cash it may be a wise move, or it may be a manifestation of a lack of confidence. If you’re not sure which, take a minute and complete this confidential self-diagnosis. You may be surprised by what you learn.

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Steve McKeeSteve McKee is a BusinessWeek.com columnist, marketing consultant, and author of “When Growth Stalls: How it Happens, Why You’re Stuck, and What To Do About It.” Learn more about him at www.WhenGrowthStalls.com and at https://twitter.com/stevemckee.

Steve McKee

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  1. Hendra Raharjaputra on June 13, 2011 at 2:29 am

    It’s possible to retain some cash in the company’s wallet, but in company’s balance sheet having excessive cash looked no good. It’s a working capital management which the business owners need to know. Yes in the condition of economy seemed still uncertainty, of course many investors, the owners are still doubtful to put their money in the right and promising business. In my opinion, In what ever condition, cash is not a king, because the king is company’s value – cash only a apart of company’s current assets.

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