Mark Carney's recent call for Canadian companies to start spending the $526 billion in "dead money" sitting in their bank accounts surprised many observers. The Bank of Canada governor is, after all, a proponent of fiscal prudence. But, keep in mind that Carney offered his prescription as he left a labour union conference. Maybe they just got to him.
Either way, Carney's advice is timely. The psychological scars of the last recession are only just fading, yet a fresh whiff of recession is in the air. Corporate austerity will only make the odour more pungent, just when Canada can least afford another economic reversal.
Companies need to have cash on the books: it helps them make capital investments, acquire other companies and protect themselves against market shocks. But, at some point, a company can have too much cash, because the return on that excess amount is outweighed by the value that would be derived from deploying it.
If a company has too much cash, that's its problem. But when many companies have too much cash, it's everyone's problem.
Consider how corporate austerity plays out in microcosm, using the firms of this year's PROFIT HOT 50 as an example. Over the past two years, these young companies grew their annual revenue by 1,131% on average. They operate in a surprising variety of industries, proving that you can thrive in just about any sector if you bring good ideas and good execution to the table—in other words, by creating value for buyers in the marketplace. Creating value is the cornerstone of economic development and growth.
Regrettably, austerity impedes such progress. When the value created by innovative enterprises like the HOT 50 isn't purchased and put to use, it remains potential value. Over time, the innovation stops. Bills don't get paid. Those companies die. Their employees lose their jobs. The downward economic spiral begins.
That scenario is extreme, but it illustrates the logic at play. Consider the flip side as well: what if a good chunk of that $526 billion were unleashed on the Canadian economy? Those companies with good ideas and good execution would gain traction faster, allowing them to build capacity and innovate for the future. Their corporate customers would derive immediate benefit in the form of the products or services delivered, allowing those clients to become more competitive themselves. Sounds like a win-win to me.
Canada needs to chalk up more of these victories—quickly. Growth is slowing just about everywhere at the moment, but the sizable spread in expansion rates between developed and emerging economies remains. We can ill afford to hamstring innovation and progress; we certainly can't let recession take us into reverse.
That you shouldn't spend money you don't have is a good rule of thumb. It should be followed by our governments, given their current fiscal mess. It does not currently apply, apparently, to many businesses—big or small. If they have immediate plans to deploy that money, we could soon be enjoying the fruits. But if they're simply fearing rain clouds ahead, then bad weather might not only be imminent—it could stay with us for years.
Ian Portsmouth is the Publisher and Editor-in-Chief of PROFIT Magazine and PROFITguide.com
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