When Lean Becomes Anorexic

There was a time and not so long ago (say the middle of last year) when having a lot, or even sufficient, cash could get you in trouble with your investors. Cash, activist investors said, was for paying out dividends and buying back shares to concentrate shareholder positions and value. Not for actually conducting business. That’s what credit was for.

Since the phenomenal growth of the 80s and 90s, and the availability of easy credit, the trend was to stay lean and have as little cash or inventory as possible sitting around taking up space. It’s not an altogether bad business philosophy, but it only works during economic up swings (which the last two decades have largely been), when the credit markets are open and lastly, when the price of everything is going up due to heavy demand. One of these factors misfiring won’t derail things, but losing all three certainly will.

What was seen as getting lean and shedding fat now looks strangely like anorexia. Companies like Microsoft and Toyota horded cash during the boom years. For their sins, the hoarders were viewed with that strange suspicion reserved for those who refuse to drink the proverbial kool-aid. Bill Gates mandated that Microsoft should have enough cash on hand to survive a year without a single sale. Now that $21 billion in cash just sitting there like Uncle Scrooge’s doubloons give him options galore to snatch up competitors for a song.

This puts many managers and CEO’s in impossible positions. Investors are an unruly, unforgiving lot who are notoriously shortsighted. Managers who wanted to keep their top jobs shed cash and paid large dividends to shareholders while amassing huge debts to “leverage” balance sheets. Now that the credit markets have crashed, businesses cannot get the credit they need to cover such basic costs as payroll. The same managers are expected the turn the situation around.

Fixing the problem could prove elusive. Far-sighted vision sounds great on the CV, but isn’t something shareholders prize. They want immediate returns and will have an executive’s head to get it. Why would a CEO set a company up for a bright dawning generation of sustainable profits when doing so will cost him his job by spring?

The “Just-in-time” dogma of the last 30 years shouldn’t be entirely abandoned. It largely increased productivity and fueled an unprecedented global growth. But it looks like managers who inherited that philosophy will have to temper it with the “Just-in-case” of our entrepreneurial ancestors.

They were fat and healthy.