Is your business saving for a raining day or planning for a sunny one?

If the Canadian economy were described in terms of a physical structure, the ongoing circulation of capital would be a key element in the foundation on which the balance of the structure rests. While this statement is obviously an over simplified comment on an extremely complex financial concept, it does highlight a significant obstacle that is currently impeding economic growth within Canada. Often referred to as “dead money”, Canadian companies are accumulating cash balances at a record pace.

Finite options are available to corporations when determining the best use of cash generated from operations. Outside of routine working capital requirements, strategic uses of funds on hand are limited to capital expenditure or acquisitions, distribution to existing shareholders through dividends or share repurchases, and balance sheet enhancement through debt repayment or the increase in cash reserves. The most recent figures from Statistics Canada confirm that increasingly, Canadian companies are favouring the latter option and that aggregate cash reserves held by non-financial corporations has grown to $630 billion.

The most often quoted reasons behind this conservative trend is preservation of capital to weather potential downturns during the ongoing climate of economic uncertainty, and the retention of sufficient balance sheet strength to realize on opportunities that may arise. Contrary arguments suggest that the decision to retain cash in case of further economic downturn is a self-fulfilling prophecy, as the reduction in funds deployed into expansion, improvements, research and innovation will impose further damage onto an already fragile economy that is struggling to create sustainable growth.

This particular situation re-ignites the debate of where the responsibility for driving a country’s economy lies. While many will look to the government, outside of short-term fiscal intervention, the role of government is to create an environment, which encourages activity that is consistent with the overall economic goals of the nation. In 2012, during his tenure as the Governor of the Bank of Canada, Mark Carney criticized the corporations that were holding large cash balances, stating “if companies can’t figure out what to do with it, then they should give it to the shareholders and they’ll figure it out.”

Mr. Carney’s statement, which undoubtedly reflected a level of frustration with the passive role that much of corporate Canada was prepared to play in the country’s recovery from recession, suggests that shareholders would be more likely to spend the capital. The challenge with that premise is that there is no guarantee that the end result won’t be the movement of “dead money” from one bank account to another.

The arguments for organizations to deploy capital targeted at the growth and enhancement of their business model are compelling. No amount of innovation, focus or determination, can deliver a meaningful product or service in the absence adequate funding for research, design and development. In addition, failure to reinvest in existing facilities and processes will ultimately result in a business becoming unable to compete within its chosen market or field. The reality is that by retaining excessive cash reserves, corporations are actually betting against our economy, our country and its people.

Challenging is arguably a fairly accurate description of Canada’s current economic climate. Following a prolonged period of recession, a relatively tepid recovery has been met with falling commodity prices, including crude oil, which has been a major GDP contributor throughout the country. For some reason there appears to a mind set that capital projects can only be undertaken during favourable economic periods, and in light of these most recent trends, it is a natural reaction to pull back on spending and wait out the inclement times. The irony is that this may very well be an opportune moment in time to undertake expansion and acquisition projects. Corporations can utilize internal personnel and knowledge resources, that become available during slowdowns, to develop assets and resources that will position their organization to realize on the rewards that will accompany eventual economic growth. At the same time, the postponement or cancellation of high profile projects has created a situation where entities undertaking construction projects will have the access to the quality trades people that proved to be elusive in an undersupplied labour market.

There are many more examples of why this is the right time to put “dead money” to work, however in each case the basic question that business leaders need to ask themselves is “are you saving for a raining day or planning for a sunny one?”