I hate losing money. I hate it when TEC members lose money. It is even worse when reasonably bright CEOs come up clueless on where the money comes from to absorb such losses. After two years of consecutive losses, I actually had one CEO explain away the problem as “paper losses.”
The ensuing conversation went something like this.
TEC Chair: Where do losses come from?
CEO: Well, our expenses exceeded our income.
TEC Chair: Okay, where does the money come from to cover these losses?
CEO: We drew down our line of credit to fund the loss. We also let some payments to our suppliers drag out.
TEC Chair: Do you intend to repay the bank? And, by the way, it would be fraud if you didn’t intend to pay them back.
CEO: Well, of course, we intend to pay the bank back. And, we’ll get our suppliers caught up as soon as we are able.
TEC Chair: So, what you’re telling me is the money that was lost is not coming from the bank or hapless suppliers. They are going to get even. So where does the money come from to pay for losses?
CEO: I guess at the end of the day, it comes from the shareholders of the corporation. You know, shareholder’s equity.
TEC Chair: Who are the shareholders of the company?
CEO: My wife and I own the company.
TEC Chair: So you are telling me the money literally came out of your pocket? Out of your wife’s checking account? Out of your kids’ college education fund? Out of your own retirement account?
CEO: Well, yes, I guess so.
TEC Chair: There is no other source. The money came out of your pocket. And, it is gone – forever. It’s not an investment, unless the loss was caused by significant depreciation charges. The money that paid for the loss is not coming back. Ever. It is forever “lost.”
CEO: I hate losses.
In light of the $1.4 trillion “loss” in 2009, we should be having the same conversation with the people running the federal government. The idea that there is a “budget deficit” that will somehow be paid for by future generations is a deception. As the government clearly intends to repay the debt it has accumulated to temporarily cover the losses, at the end of the day, the “shareholders” of the country are taking it in the shorts even though we don’t seem to feel it just yet.
The federal government “lost” $650 billion in the first five months of the fiscal year. It “lost” $220 billion in February alone. The projected P&L (it’s not a budget) for 2010 plans for a “loss” of $1.56 trillion. The money will come out of the shareholder’s pockets.
How can that happen? How will shareholder’s equity decrease to pay for the trillions of dollars of accumulated losses?
The most insidious solution will be a nice, healthy dose of inflation. Steady price rises, over, say, the next 20 years would do the trick. The government gets to pay back its loans with cheaper dollars. The shareholders, like frogs in a frying pain, don’t feel much pain until it is too late.
Problem is the dollars that the shareholders earn and use to buy stuff are worth less. Not quite worthless, like the Zimbabwe bank note, where they now print $100 trillion bills. But certainly worth less and incapable of buying as much as before. That is a real decrease in our ability to maintain our standard of living. A real decrease in shareholder’s equity.
The next time the folks in Washington talk about a deficit, think of it as a loss. When they talk about a budget, think of it as a projected P&L. And when the projected P&L is projecting a loss, think of it a loss of shareholder’s equity. And we are the shareholders. It’s not a deficit. It’s a loss.
Dennis Ellmaurer is a principal of Globe National Corp., a Milwaukee firm working exclusively with sellers of small businesses in southeastern Wisconsin. Ellmaurer also is a chairman of The Executive Committee (TEC), facilitating three CEO groups in southeastern Wisconsin. He can be reached at dennis@globenational.com.
