Recently, I was asked to speak to a group of business owners in Memphis who meet regularly to focus on growing their businesses. My topic was the title of my new book, Unlocking Private Company Wealth, and each participant received a copy of the book.
I spoke about the need to use private businesses as vehicles for diversification and the creation of liquidity outside of the businesses that can create wealth. One of the things I talked about was the appropriateness of paying dividends or distributions to owners, especially when reinvestment opportunities in the business may not be attractive. I suggested that keeping lots of excess cash on hand is not a good business strategy because it carries bad baggage, including:
- Dampening shareholder returns. Return on equity declines as cash and other assets accumulate.
- Deferring shareholder liquidity. Assets held in a business are not on their owners’ personal balance sheets and are unavailable for diversification purposes.
- Diminishing owner management focus. Companies with lots of cash and excess assets don’t seem to have the same intense focus on generating shareholder returns. It is too easy to become “comfortable” and inattentive to available opportunities.
After my discussion, one business owner said that his company had as much cash on hand as its annual revenues. I asked one simple question: “Why?”
There was no good answer, so I gave some unsolicited advice.
“Pay all of that cash as a distribution to owners. If you are concerned that you might need the money, keep it in a segregated account. You can always put it back into the business. But I guarantee that you will think differently about those dollars when they are yours outside the business than when they are sitting on the company’s balance sheet. And you will think differently as the manager of the business about your spending and other decisions when you don’t have that big cushion sitting there.”
And then I said, “Sermon over!”
I don’t know if they have made a distribution of those funds yet, but I hope they have. In my experience, lean is better than fat when it comes to company balance sheets.
If you are sitting on a mountain of cash or other excess assets, consider getting them out of your company as soon as possible. Take a look at this earlier post I wrote on this topic: Dividend Policy & 5 Reasons NOT to Keep Excess Assets on Your Balance Sheet.
For your further reading, let me introduce an article from the Financial Analysts Journal a few years ago, “Surprise! Higher Dividends = Higher Earnings Growth.” I’ll write about this article in the near future.
Please feel free to comment about this post. As always, call me (901-685-2120) or email me (firstname.lastname@example.org) if you would like to talk about any ownership or management transitional issues in confidence.
Until next time, Be Well!