Money in the bank

Let's turn now to what happens to the money that remains after all the bills and taxes have been paid. A small amount is paid back to the shareholders as dividends, but the overwhelming percentage goes into the corporate treasury--the bank account--the money bin. When a company runs the kind of margins Autodesk does for all the years we have, that adds up to a tidy sum: in Autodesk's case more than $140 million. When thinking about the future of the company, what can and can't be done with that cash is vital to understand.

At the simplest level, the money belongs to the company and management can do anything it wishes within the law: give some back to the stockholders as a special dividend (as we did in 1989), buy other companies (as in the Generic Software acquisition), buy real estate or other capital goods for the company (for example, the scheme to build a ``campus'' among the cows), or just invest the money, collect the income, and add it to earnings. The overwhelming percentage of Autodesk's cash is currently invested in safe, short-term interest bearing securities, which is why I sometimes refer to Autodesk as a ``combined high-tech company and money fund.''

But here's the essential point. When you spend a dollar, whether to hire a programmer, buy a truck, run an ad, or take over Chrysler, it it doesn't matter whether it came from the bank account or from current sales. Many people think that because Autodesk has $140 million squirreled away (not counting the ball of string or the First Dime), we can use that money free of constraints. If I ran the zoo, I'd change the accounting system to cut some slack for companies that put away profits against future needs, then dipped into the cookie jar when an opportunity presented itself or an unanticipated risk emerged. But that isn't how it works. Regardless of how prudent you've been piling up money over the years, the moment you spend any of it in your business, it's just as if you increased your day to day operating budget. That means rising expenses without an increase in sales, and that translates into...falling margins.

About the only thing you can do with the money that doesn't cause margins to fall, other than giving it back in dividends, is investing it in other companies. When you make an investment, that's carried on the books as capital. As long as you don't have to write the investment off, it doesn't affect your operating results. (Outright purchases of companies or large percentage investments force you to merge or consolidate their earnings with yours, however, creating the risk of falling margins.)

The accounting for money in the bank, then, can create a situation where pressing company needs remain unmet because the expenditures required would cause margins to fall, yet at the same time, the company is actively investing its cash hoard outside the company, in other businesses, because those investments do not show up as current operating expenses. Thus, the accumulated earnings of a company, the ultimate result of its success, can benefit any venture except the one that made the money in the first place.

Sound familiar?