Businesses Do Not Run Balanced Budgets

Moneybox
A blog about business and economics.
Feb. 11 2012 11:18 AM

Businesses Do Not Run Balanced Budgets

Speaking at CPAC yesterday, Mitt Romney apparently drew the following analogy between his experience in the leveraged buyout game and his approach to the federal budget:

In business, if you’re not fiscally conservative, you’re bankrupt. I spent 25 years balancing budgets, eliminating waste, and keeping as far away from government as was humanly possible.
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That's not right at all. Obviously Mitt Romney knows that firms borrow money all the time. That's why we have a financial system. If failure to precisely balance revenue with expenditures led to immediate bankruptcy there would be nothing for banks to do. This does, however, raise the interesting and oft-neglected point that corporate accounting and government accounting operate along very different principles. If I'm running a modestly profitable burrito company and decide I could be making even more money if I opened even more stores and so go sign some leases and spend a bunch of money building out the new kitchens, we don't register this as suddenly "spending" far exceeding "revenue" and freak out about the deficit. What we say is that the balance sheet now contains both more liabilities (debt to someone who loaned me the money) but also more assets (all the kitchen equipment I bought) and then my challenge is to earn a return on my investment in those assets before they depreciate (i.e., break). But a company that thought it had the opportunity to make a lot of high-value low-cost purchases would never avoid doing so simply because it might involve increasing its outstanding stock of debt. Conversely, a company like Facebook or Apple doesn't automatically ramp up its spending just because revenue surges or because it's rich in cash. The questions to ask are never about stockpiles of debt or cash and always about the value of the investment.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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