CFOZone.com - The Network of Corporate Finance

Cable companies like Cablevision are saving cash to survive the recession, but have to do so by cutting costs and spending on capex for instance.

It doesn't seem it will be a problem to jump start growth again once the economy rebounds though (See Cable TV operators channel efforts into boosting cash http://www.cfozone.com/index.php/Cash/Cable-TV-operators-channel-efforts-into-boosting-cash.html. )

But that's not true of all companies. Ira Jersey of RBC Capital Markets followed up with the following comments:

"Strong earnings can only continue if unit sales increase, productivity increases (price per unit made decreases), or unit price can be increased. We believe the first and last are unlikely in the coming environment of slow but above zero growth, so only productivity can drive earnings. So those firms that have recently invested in productivity are likely to initially post better results than those that have not, in our view."

Have you heard of other companies (or is your company) trying to save cash? If so, what are they cutting back on to do so? And how could it affect them going forward?

According to a recent report from Deloitte, in a cross-industry survey of over 300 senior executives, cutting costs remains the top strategic priority, with 56 percent of surveyed executives ranking cutting and managing costs as their top strategic issue.

This is not likely to go down the totem pole any time soon.

Hoarding cash is the order of the day for anyone who is not hemorrhaging it. But hoarding cash is a corporate irresponsibility: if the firm doesn't have a good place to invest cash, its duty is to return that money to shareholders in dividends. That sounds short-sighted but there's a real agency problem when the board decides that they know what to do with the owners' money better than the owners do. It's no wonder, though, that no one does return profits to the shareholders. Until a fiscally conservative review and simplification of the tax code comes along and removes double taxation of dividends, companies will sit on cash.

MWard, See my blog on just that issue today, though I didn't touch on the taxation vexation.
The other option is capital investment.. investors have been waiting forever, it seems, for that next big wave.

Maybe shareholders want to see cash returns, meanwhile in this economic environment it looks better to keep the cash to make interest payments and repay bondholders. By hoarding cash, companies can also work toward getting their credit ratings upgraded and ultimately lower their cost of debt. Obviously, there's always two sides of a coin.

This a real conundrum that I don't think finance theory has adequately addressed. The thing is, fiduciary duty gets complicated when a company's solvency is called into question, so returning cash to shareholders isn't a slam dunk. In fact, managers may owe as much duty to debtholders and employees at such times.

Of course, theorists also argue that a BB rating is the most cost effective, implying that leverage should be maximized to produce the lowest WACC. But that theory makes an exception for times of financial stress. And guessing when those times are going to materialize is a fool's game, as we've just witnessed.

The essential problem, as I see it, is that capital investment is collectively a chicken-and-egg proposition. Few companies invest capital unless there are ample opportunities to earn a decent return. But those opportunties won't materialize if too few companies invest.

That's why the Fed is pushing on a string right now.