People like to scream about the national deficit and national debt. Unfortunately, most folks don’t know what the terms mean. So, in simple terms:

Deficit: Amount of expense that exceed revenue. In 2001, the deficit was $515 billion.

Debt: The actual amount of cash-money owed to some other entity(ies).

I often tell people that the National Deficit is made up. Here’s why: In 2002, the government reported interest on debt of $332,536,958,599.42. Yup, looks like a ton of money. Here’s the thing though. It’s not money. It’s expense. This expense is about 5% of some astronomically huge number ($6,228,235,965,597.16 to be exact). But this is not the actual cash impact of the debt. Think of it this way, you buy a car for $20,000 at 5% interest. Your annual interest expense is $1,000. It doesn’t matter if you’re paying a $400 a month car payment. So, interest expense has no impact on cash flow. In fact, several transactions have minimal impact on cash flow. Since we all know the government isn’t paying any of this back until they have to, the cash impact is usually minimal. In terms of trillions of dollars, what’s a few million?

To wit, here is a brief analysis based on the US Government’s 2001 financial statements (in billions):

Net Cost (514.80)
Net cash effect of changes in:
Military Employee Liabilities 406.80
Veteran Liabilities 139.30
Civilian Employee Liabilities 50.10
Environmental Liabilities 5.70
Depreciation 21.40
Benefits Payable 8.10
Taxes Receivable 2.20
Other Liabilities 13.10
Other Miscellaneous Liabilities 12.70
Plant, property and equipment (34.40)
Accounts receivable (1.90)
Inventory 1.40
Other assets (3.70)
Principal payments 19.90
Other Differences 1.10
Total Impact of non-cash: 641.80

Budget Surplus: 127.00

Despite having a deficit of $515 billion, the changes in non-cash transactions show us that the government is actually cash flowing. Plus, if you add back the $217 billion in FY01 on interest, well you get the idea.

SayUncle’s Free Advice: When looking at financial statements of any entity, the statement of cash flows is the best way to determine a company’s financial condition. You see where the cash comes from and where it goes. Forget income and forget the balance sheet. They’re made up. Cash is where it’s at. Which is way your investor types like to use EBITDA (earnings before interest, taxes, depreciation, and amortization) because this is essentially a quick cash flow measure that you can do using the income statement. You take earnings (income) and add back interest, taxes, depreciation and amortization since these types of transactions are non-cash in nature. Also, the changes in balance sheet accounts can show cash flow issues. For example, if accounts receivable are higher in the current year than in the prior year, the company has collected less cash from sales. Hope that wasn’t too damn boring!

Posted in uncategorized on January 6th, 2003 by SayUncle | RSS 2.0 |