[pranavGTI]

I believe, as per companies act, a portion of profit after tax should be kept aside as cash reserve. Don't companies have that money to utilize in such critical emergency period. Cash in the reserve accumulated over the years should be good enough to sustain. Experts in TBHP let me know if this incorrect.

[1.2TSI7DSG]

I would put in my 2 Cents:

Based on the permanent income hypothesis, as individuals, we invest in savings as we expect someday we won't have an income and will need to stock the supplies. this assumption in the case of organisations is that they will find a way to overcome the crisis every time and have income in perpetuity for which investment is required. If you have cash why in the world would you borrow from outside to raise money - unless you are getting the money at a much lower interest rate that your savings return rate more than the borrowing rate.

One can think of banks as business who buy & sell money. They buy money (FDs, Savings, MFs, etc) from us and they lend it to COs(expansions, working capitals, etc), individuals(homes, education, cars etc), etc. So under normal circumstances very rarely that a saving return will be higher than the borrowing rate. Hence asset-based companies rarely stock cash. Google, etc are knowledge-based and hence have the luxury of stocking cash under the premise that there can be an opportunity to take over of a patent/company which might disrupt their current business.

As every business banks also have risk. And the risk-adjusted rate of return is based on credit history, your current liabilities and the promise that you show in future. And under the promise of a higher return, it is absolutely alright to take the "calculated" risks. The problem which very similar to driving is when is that one time you will take a risk & it won't be in your favour. In case of yes bank: RCom, IL&FS, VODA-Idea all failed at a similar point/successively which as per any business simulation/judgement would return a probability of less than 1/1million. This is similar to Malaysian airways losing two consecutive planes, which no other airline in the work has had a history of. At some point, you will have to cut of your safety net and trust that you will survive.

Some interesting links to cut the curfew:

https://www.investopedia.com/terms/p...hypothesis.asp
https://www.investopedia.com/terms/r...stedreturn.asp
https://www.investopedia.com/terms/n...erest-rate.asp

[Malyaj]

CAs and Auditors do their limited job and do not have any role in investment or spending decisions. For those there are the CEO/CFO and Board of Directors. And yes, believe it or not, sitting on piles of cash is sometimes considered a stupid thing, specially when the world is worshipping jet setting, cheque writing investors sitting as judges on startup reality shows. It projects an image of a dumb CEO, unable to identify the next growth opportunity and idling the cash of its shareholders in a lowly fixed deposit.

This crisis is like a Titanic that has hit an iceberg, not a ship that has a small hole and sinks slowly. It was cruising away to glory, completely oblivious of what lay ahead. No one planned for this hence the sudden shock and pain.

Businesses which are hit badly and immediately are B2C businesses, for obvious reasons. However, this sector will also recover first while the other sectors will know the exact extent of the damage only over the course of the year as engagements are trimmed or cancelled entirely.

As many have mentioned correctly, debt is a major reason why many companies are feeling the pain. Traditional companies still prefer to finance expansion and even acquisitions through debt as it is theoretically a cheaper alternative to equity and comes with lesser strings attached. Many startups nowadays are all equity funded and are less likely to feel this pain in the short term, although there will other types of pressures on the founders now. Other type of companies which are hit in the gut are those for whom rentals or lease are a large part of the expenses - airlines, high street retail, co-working spaces. When revenue is down to a trickle, or even zero, everything is a cost and this eats up savings at terrifying speed. I am talking from first hand experience.

[neil.jericho]

For a more global view on this issue, do read this very informative article by CNBC. It is amazing how far human greed can take companies to the edge of insane decision making. Read the article here.

Take McDonald’s. With $21.1 billion in revenue last year, it ended 2019 with only $898.5 million in cash on its balance sheet, a little more than two weeks’ worth of sales. Considering that the fast-food chain, which owns more than 2,600 stores, franchises 36,000 more and employs 205,000 people, generated $5.7 billion in free cash flow last year, it could have as much cash as it wants. Instead, McDonalds’ bought back $4.9 billion worth of stock in 2019 and paid another $3.6 billion for its dividend, almost exactly the $3.24 billion the company borrowed last year.

“As McDonalds goes, so goes the fast food industry,” Conti said. “They were in a position to raise wages and set an example for other companies to follow. Instead of that, they went into debt to further enrich shareholders and executives.

[ZenMaster]

So if I understand all the points right, the reasons are:

1) Low profit margin businesses that require high working capital which forces them to rely highly on HUGE amount of debt.

2) Greedy shareholders that want every penny the company earns who will jump ship as soon as they see greener pasture driving share prices down and forcing companies to hand out more as dividends, share buybacks etc. to keep share prices high.

3) Hungry executives who pleasure themselves with obscene bonuses and perks thinking nothing can ever go wrong and the confidence that they can shift the burden of loss onto the govt. And on workers. if something goes wrong because they are too big to fail.

4) Too many people with ideas and drive but not money so they borrow essentially taking leap of faith hoping nothing goes wrong.(basically they just had bad luck)

5) companies that splurge their money hoping that payouts to politicians and parties are enough to keep them out of the hook suddenly facing something no one saw coming.

Basically what started out as pandering to shareholders, corruption, crony capitalism and executives giving themselves a pat on the back with bonuses has become the NORMAL and no one stopped to think otherwise because money and power makes you shortsighted.

[akshye]

In a different perspective -
Company is not a human or a family. You can compare company to your car. You run it well, maintain it well. Do you save for the future of your car, like you plan for your child's education? If your car has severe breakdown, after all the care taking - you sell it out and buy new one; however dear it had been to you. Guess what you do with your company?

[ashokrajagopal]

Originally Posted by neil.jericho

For a more global view on this issue, do read this very informative article by CNBC. It is amazing how far human greed can take companies to the edge of insane decision making. Read the article here.

If only they said all this out loud during the boom.
Not just McD, almost all "stock market winners" of the last decade used stock buyback as the number one tool.
I saw an article on Moneycontrol yesterday as well. Moneycontrol, of all the places explaining why the recovery from last recession was fragile.
None of the mainstream media call these things out as an when they happen. Of course when there is a downturn, everybody has an op-ed on what went wrong 5 years ago and was always out in plain sight.
Its almost as if mainstream media has an incentive to keep mum about some stuff.

[fiestarry]

When businesses make insane profits the owners stick their head in the clouds and indulge in luxurious lifestyles. They don't run to the Govt and ask how they can help the poor or the society at large.
When they make losses, the Govt has to give them waivers, tax holidays etc.

[harishF1]

Fundamentally, companies work on the principle - the money invested in the business yields/ multiplies better than the bank investment. Also, they can make borrowed money work better and multiply it faster than the bank could do it. This is different from an individual's perspective, as for me, I have fewer means to make the money work better for me than the bank FD (it would be a function of my risk outlook).*

For companies, everything is fine till the time the business is doing well. Catastrophes like the current one are hardly predicted. Even if predicted, companies would rather resort to cost cutting measures than have a reserve fund for the rainy day.

The current situation has a dominos effect. People would sacrifice the luxuries of life (travel/ eat outs/ new cars/ etc) as the 1st step. This would lead to lower demand for the next level of goods and services which can be restricted or postponed. People are trying to hoard money for their uncertain future. Most contract workers, even many regular employees, would get lower pay checks or may be part of RIF. The customer base for most companies are shrinking due to these factors; which seem like a downward spiral.*

Essential goods and healthcare industry would come out strong; for the rest of the companies and people the*question that looms - how long will it last?*
To answer the point, I am not sure if any organisation wants to be conservative and retain all profits in cash and not invest in expansion and acquisition. Everyone including employees, shareholders and customers want more, new and out of the box stuff. How can that happen without investments in innovation, improvisation and technical value propositions?**

[Samurai]

All the companies that have gone the LBO route are in big trouble. They will simply not survive this sudden drop in business. Fortunately, LBO was never allowed in India.

Here is an hard hitting article on this topic:

The average family is encouraged to save money for a rainy day, in case they are fired, or they face hardship. Saving some money is considered prudent. It’s quite different for business. Companies pocket the profits in the good years and ask Uncle Sam to bail them out in the bad years. Heads shareholders win, tails the taxpayer loses.

Industry can’t be blamed for not expecting an act of God or force majeure, but in the past 30 years we have seen two Gulf Wars, 9/11, SARS, MERS, Swine Flu, the Great Financial Crisis, etc. Saving for a rainy day should only be expected in cyclically sensitive industries.

But rather than do that, companies have been engaging in a rather more reckless strategy: borrowing to buyback shares. This may boost their Return on Equity (ROE), but it is not remotely prudent and makes their companies highly vulnerable. Borrowing to prop up their own shares means they have less on hand when hard times come.

According to Barons, “Stock buybacks within the S&P 500 index totaled an estimated $729 billion in 2019, down from a record $806 billion in 2018.”

And then along came coronavirus.

Of those industries that are now seeking a bailout, none has saved for a rainy day. Boeing, the poster boy of financial engineering and little real engineering, bought back over $100 billion worth of stock over the past few years. Today it is asking the government for a backstop to its borrowing.

[sridharj77]

The top 3 things a Company cares about (and essentially the definition for a company) are:


1. Customers
2. Shareholders
3. Executives


and if its a slightly ethical one, employees.


Running a business today is essentially through OPM (other People's money), which is the shareholders, so any profits have to be distributed as much as possible among them with some give back to the customers through discounts, offers etc


If they run out of money, then shareholders lose their investments and employees lose their livelihood. The tax payers can complain what they want, because they are neither (being a customer doesn't count - you got what you paid for - you are a transaction)

[Thad E Ginathom]

I don't understand the obsession with share price. Plainly, it is a reflection of the status and reputation of a company, but share buyers are not investing in that company: they are buying shares from another person, and the chain to the original investor is irrelevant.

[SmartCat]

Originally Posted by Thad E Ginathom

I don't understand the obsession with share price. Plainly, it is a reflection of the status and reputation of a company, but share buyers are not investing in that company: they are buying shares from another person, and the chain to the original investor is irrelevant.

That's a bit like saying "Buyers are not investing in an apartment complex or shopping mall. They are buying an apartment/shop from another person, and the chain to the original investor is lost"

But I get your point.

Whenever management or promoter obsesses over stock price, it usually brings bad news over the long term. It makes them take silly decisions - like making multi-billion dollar acquisitions by taking huge debt. And whenever people (investors) obsess of stock price, they usually end up making terrible mistakes. They end up buying something for more than what it is worth.

[Thad E Ginathom]

Originally Posted by SmartCat

That's a bit like saying "Buyers are not investing in an apartment complex or shopping mall. They are buying an apartment/shop from another person, and the chain to the original investor is lost"

It is almost exactly like that. The developer has made his money with the initial sales, and need have no concern for future resale prices. Well, ok, it is an imperfect analogy, because neither does he have to pay dividends to current or future owners.

But when I hear people say, "I invested in ABZ company," I think, no you didn't, unless you bought their share issue. The guy has an interest in the future of that company, but he did not contribute anything to the company itself.

[ritz3645]

Originally Posted by akshye

In

Events are dynamic, as they separate the men from the boys, or separate /sort the wheat from the chaff.

This is a life event & only professionally run & shipshape businesses will survive.