Readers who’ve raised teenagers may be familiar with a conversation that goes something like this.
Teenager: Can I borrow $50? I’m going to a concert on Saturday. [Asking for money bypasses the customary request for permission to go to the concert. Clever!]
Me: [Trying to look a little serious. Possibly judgmental?] You really shouldn’t be spending money before you’ve earned it.
Teenager: [Touches the carpet with right foot. Hoping to appear assertive yet patient with a parent who may have cognitive limitations.] I have earned it. It’s just that I’m temporarily short of money.
Me: [Wondering which planet developed teenage logic.] What do you mean you’ve earned it?
Teenager: [Puts hands on hips. Too assertive? I am here to borrow – not to fight.] Well, I did that babysitting job last night. I made $100!
Me: [Knowing where the conversation is doing, but making one last ditch effort to preserve the contents of my wallet.] So, if you made $100, you should be all set. Right?
Teenager: [Tempted to roll eyes, squirms a little, shuffles feet.] No. I need $50. It’s just that Mrs. Jones said that she’d pay the $100 as soon as she came home last night. But she forgot to go to the bank…
Teenager: So, I earned the money, but it’s kind of not in my hands right now. But it’s still my money.
Me: So, is that my fault?
Teenager: [Wondering whether this parent is incurably stupid.] Well, no. But I’ve been doing babysitting for Mrs. Jones for over a year now. I know she’s going to pay me. I just have to wait until I do babysitting for her again next Tuesday. [Removes hands from hips and look of defiance. Perhaps it’s time to grovel!] But I promise you that when she pays me, I’ll give it straight back to you. You know I always pay you back when this happens, and I’ve paid off every penny of what I owed you before. So I really have $100. Please lend me the money — this band is so awesome and this might be my only chance to see them play! Ever!
Me: [Careful not to establish a precedent.] Well… just this once…
Teenager: [Careful to establish a precedent.] Thank you! Thank you! I knew you’d say yes. It’s so nice to know you’re always there for me.
If the teenager had taken our course, “Accounting Comes Alive,” here’s how she might have presented the case:
My business is profitable. Last night I had income of $100 with no expenses whatsoever. On my balance sheet, I have assets, including a healthy set of accounts receivables totaling $100 from a reliable customer. I would like you to consider a loan of $50 to solve my short-term cash flow problem, creating a very reasonable total debt to total assets ratio of only 0.5.
You can expect repayment in full next Tuesday. Considering the accounts receivables I am offering as surety, my reliable track record of repayment, and the fact that there are no other liabilities on my balance sheet, and, of course, your undying affection for me in your capacity as my parent, I propose that this loan be free of interest. Perhaps, to save you the inconvenience of future loan applications and, of course, to make sure my future needs are met, we should treat this transaction as a revolving line of credit rather than a one-time loan.
The teenager understands quite a lot of things many adults have a hard time figuring out, including:
- Income and cash are two different things.
- Accounts receivables are an asset.
- An asset can be used to secure a loan.
- A business can be profitable even if it has no cash whatsoever.
- Expenses can be kept to a minimum by avoiding interest payment on debt.
- Loan decisions are made with hearts as well as minds!
Johns Hopkins University employees who would like to understand these matters thoroughly can register for our course, “Accounting Comes Alive,” by clicking here. You will learn about balance sheets, income statements, and how business works. We will also talk about the university’s most recent financial statements.