Where Do Losses Come From?

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.