The left side must match the right side.
This directive seemed simple enough. But it still caught me off guard
I was sitting in my Financial Accounting class – the first course of my first semester of business school. And the balance sheet was the first topic on the agenda.
This was my initial foray into business terminology. The opportunity to level up my game was upon me. And yet, I was already feeling behind.
I understood the basics of the balance sheet. Assets belonged on the left side, while liabilities belonged on the right. Those principles matched the software I used for household budgeting.
But this concept of the two sides being equivalent was confounding.
Wouldn’t it make sense to have more assets than liabilities? Wasn’t that the definition of profit — and the goal of business?
After a few moments, I worked up the nerve to ask the professor about this. He replied that businesses aim to have more assets than liabilities. But when that goal is attained, companies are obligated to reinvest the surplus in the business. They might do this by paying a stock dividend, raising salaries, or expanding to new lines and territories.
Regardless, those reinvestments would show up on the right side of the balance sheet. And everything would balance out.
I now had the clarity I needed to internalize the concept. But my entire world had been turned upside down.
When I was young, my father and I had a tradition. Just before bedtime, he’d read a new chapter of a book, allowed.
These books weren’t Goodnight Moon or Where the Wild Things Are. I’d already outgrown those children’s classics.
No, they were literary masterpieces like Tom Sawyer, The Adventures of Sherlock Holmes, and — eventually — The Hobbit.
J.R.R. Tolkien’s classic was an audacious step for our reading journey. For while Tom Sawyer and Sherlock Holmes were figures of historical fiction, The Hobbit was a creation of pure fantasy.
I had never explored imaginary worlds like this before. And yet, as Bilbo Baggins made his way through Middle Earth, I was enthralled.
Eventually, Bilbo made his way to a mountain cave inhabited by a fire-breathing dragon named Smaug. The dragon had been hoarding vast amounts of treasure in his lair for more than a century, and Bilbo’s quest was to claim it back.
As Bilbo approached the apex of his journey, the readers got to know Smaug a bit better. He proved equal parts cunning and dangerous. He was equally prone to bursts of arrogance and fits of rage. But above all else, he was fiercely protective of the treasure that lay below his armored belly — a haul of golden trinkets that he was determined not to share with anyone else.
As I took in this description, I thought of my school classmates. I was only in first grade, but I wasn’t too young to notice that they lived in nicer houses than I did.
Those houses had large televisions in them and lavish kitchens stocked with all kinds of snacks. Some of them even had a pool in the backyard. My home, by comparison, had none of this.
Perhaps Smaug was onto something. Maybe the marker of success in this life would be how much treasure you could hoard, and how little of it you would share.
This notion, most assuredly, was not the takeaway Tolkien intended for Smaug. But as the years rolled on, I clung tighter and tighter to it. And by the time I entered adulthood — with the carnage of the Great Recession all around me — I had a clear goal. Make a profit and hold on tightly to those excess earnings.
That goal eluded me in the early going. Working in the news media on a rock-bottom salary, I struggled to make ends meet. And when I left that industry for the business world, my earning power only moderately improved. I was living hand to mouth each month, hoping against hope that future salary raises would match increases in my apartment rent.
This reality, more than anything, is what led me to the business school classroom. I’d determined that the only way to get to financial sustainability was to worship at the altar of Smaug’s lair. To see how successful businesses built their treasure hoard, and to use that knowledge to build my own pile of gold.
But now, at the start of my own quest, I was learning that this vision was no more than an illusion. Companies didn’t hoard their profits in a mountain lair. They reinvested them instead.
It was quite the plot twist. And I needed to recalibrate.
Why do businesses exist?
It’s a simple question without a straightforward answer.
Economists might point to supply and demand. Public relations types might wax poetic about brand equity. And psychologists might speak to the merits of great customer service.
These are all valid answers. But they don’t get to the ethos of companies.
At a most basic level, businesses exist to serve their communities. It’s a symbiotic relationship.
People with unmet needs rely on businesses to fulfill them. And businesses rely on the revenue from those people to stay solvent.
This dynamic is at the very heart of capitalism. It was featured in The Wealth of Nations by Adam Smith himself. And it’s precisely what the balance sheet seeks to illustrate.
No legitimate business will survive by simply lining its coffers and enriching its owners. Competitors will take a sledgehammer to a fat cat incumbent’s competitive advantage. And customers — tired of being ripped off — will bolt for other options.
Healthy companies must reinvest their gains in their business. They do this both to bolster their staying power and to solidify the ties with the market they serve.
There’s a reason why Disney didn’t stop with animated films. There’s a reason why Apple didn’t stop with desktop computers. There’s a reason why Ford didn’t stop with the Model T.
That reason was sustained market relevance. And it was reflected on each firm’s balance sheet.
The left side must match the right side, indeed.
But why leave this principle to corporate interests alone? Is there value in it beyond the boardroom?
It turns out that there is.
You see, our life journey is often billed as a quest in pursuit of a walled garden. We claw and scrap to make ends meet at first, until we can get a footing. Once we do, we’re primed to seek the most exclusive corners of materialism.
The hulking mansion on a secluded street. The flashy sports car that zooms by in a flash. The member’s card at the country club. These are the spoils society primes us to claim once we’ve “made it.” And once we claim our share, we find ourselves searching for ever more spoils to hoard.
We’re Smaugs in training. We sit alone atop gilded treasure, sustaining nothing other than deluded fantasies of grandeur.
It’s hardly the place to be.
Perhaps we can choose a better path — one illuminated by the businesses in our midst.
This would mean embracing the principles of the balance sheet. It would mean taking in only what we need to sustain ourselves and reinvesting the rest of our spoils in the communities we’re part of.
That investment could take many forms — from charitable donations to a simple commitment to spend time with those around us. But regardless of the precise path we choose, it’s the direction of the commitment that matters.
A balanced, symbiotic direction.
The left side must match the right side.
Let’s make it so.