Wednesday, September 17, 2014

Growth in a Lower-Margin Business

E-commerce is changing how business is done in a variety of industries. The fact that more commerce is moving online is having a big impact on the shipping business. After all, someone has to ship all those goods that we buy on the web.





UPS is been greatly affected by these changes. A recent Wall Street Journal article, “At UPS, E-Commerce Boom Proves a Heavy Lift” (9/12/14) discusses the changes. Here’s a link to that article:


Consider these points:
·            Net income last year (2013) was the highest ever at UPS. However, profit margins on U.S. deliveries have been flat for 3 years.

·            E-Commerce sales are growing rapidly. In the second quarter of 2014, 5.9% of all retail sales in the U.S. came from e-commerce. E-commerce vendors, led by Amazon, have introduced free shipping as a way to gain market share. Because Amazon is such a large UPS customer, they can pressure UPS to lower their shipping prices.

·            The E-Commerce trend requires the typical UPS driver to make more frequent stops to deliver smaller packages. The shift requires more time and fuel expense- which both increase UPS’s costs.

So, if you’re UPS and you’re facing pricing pressure from customers like Amazon, how do you cut costs? Well, here are few things they are implementing:

·            Specialized packaging: UPS will introduce pricing that will encourage customers to use boxes that fit the items being shipped. If UPS can use the room on their trucks more effectively, they fit more boxes in a given truck. That reduces the need for a driver to return to a warehouse to load more boxes- saving time and fuel costs.

·            Know where you’re going: UPS is also investing in a route-optimization system. The program will map out the best ways to pick up and deliver packages.

A Sales Mix Issue:

What’s going on at UPS can also be viewed as a sales mix issue. Sales mix considers the dollar amount of sales you generate for a group of products. Managers need an apples-to-apples comparison of each product’s profitability. Each product has a different sales price, so management needs a tool to compare profit levels.

There are several ways to make this comparison:

·            Profit margin as a percentage: Profit margin is defined as (Net Income)/ (Sales). If a $100 sale generates a $15 profit, the profit margin percentage is ($15)/($100), or 15%. To increase total company profit, the manager can attempt to sell more of the product that generates a higher profit margin percentage.

·            Contribution margin per unit: Contribution margin is defined as (sales – variable cost). Contribution margin is the dollar amount you have to cover fixed costs and generate a profit. A second way to analyze sales mix is to review contribution margin per unit sold. Assuming that all sales incur fixed costs, this analysis only considers variable costs and sales revenue. The product with the higher contribution margin per unit is more profitable. A manager can shift sales toward those more profitable products.

The UPS problem is that industry trends are pushing the firm to take on more E-Commerce business. This business is less profitable than other product lines. UPS is attempting to lower costs on E-Commerce business. Another part of their strategy will likely be to increase sales other business lines that are more profitable.

Here's my podcast on this topic:


For blog and article writing, tutoring and speaking on investments and finance, contact me here:


Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies (2015)
 (amazon author page) amazon.com/author/kenboyd 
(cell) (314) 913-6529
(website) www.stltest.net
(you tube channel) kenboydstl
(podcast: website link and on ITunes)
https://itunes.apple.com/us/podcast/accounting-accidentally/id911793420 
(facebook) St Louis Test Prep
(twitter) @StLouisTestPrep
Author: Lynda.com
Instructor: Financial Times/ ExecSense Webinars



Image by bballchico, Creative Commons License

Monday, September 15, 2014

Cash Shortage: Not Turning The Crank Fast Enough

In a mid-Sept. 2014 announcement, Radio Shack warned that it would soon run out of cash. The firm could be forced into bankruptcy if it can’t find a way to shore up its finances.




The news was reported by several news outlets, including the Wall Street Journal’s “RadioShack Needs a Financial Lifeline” (9/12/14). Here’s a second story:


So, what choices does RadioShack have? Here are a few:

·             Recapitalization-Debt: Companies raise money to two basic ways: Issue stock or bonds (debt). If RadioShack has debt outstanding, a creditor could make several changes to the loan agreement to ease the financial burden- giving time to the firm to collect more cash. The creditor could lower the interest rate, or extend the principal repayment due date (the maturity date).
·             Sell a Portion of the Company
·             Recapitalization-Issue More Equity: This choice seems the least attractive to an investor. The firm could issue more stock, and use those proceeds to either meet their cash needs or pay down debt. Since the firm’s future prospects are so bleak, it may be difficult to find additional equity investors.

The Wall Street Journal reported that, as of August 2nd of 2014, RadioShack only had the equivalent of $6,800 in cash per store. In addition, the company warned in a Sept. 2014 SEC filing that they may not remain a “going concern”. A going concern means that a company is viable moving forward. The firm can generate sales and earnings each year. RadioShack is essentially reporting that the cash shortage may prevent the company from paying their bills- which may prevent them from operating.

So, let’s relate RadioShack’s issue to some accounting concepts. The root problem of a cash shortage is cash turnover. Cash turnover relates to the accounting cycle. Here’s the cycle:

·            Spend money on materials, payroll, inventory
·            Create a product or service and sell that service to a client
·            Collect cash from sale
·            Use new cash collections to start over again

You can think of cash turnover as turning a crank. The faster you turn the crank, the quicker you receive cash. Cash is a way of recovering the costs you incur to do business. Operating your company requires spending. Here are few examples:

·             A plumber drives a $20,000 truck with $10,000 of equipment (you’d be surprised how much cost goes into equipment). That’s $30,000 driving down the road. If the plumber does $90,000 in business with the truck and the equipment, he’s “turned over” his investment 3 times ($90,000/ $30,000).
·             A storeowner has $200,000 in inventory. If that storeowner has sales of $600,000 per year, inventory turnover (sales/inventory) is 3 ($600,000/$300,000).


Your goal is to maximize your sales- using a minimum investment in assets.

Check out my podcast on this subject:

http://accountingaccidentally.podbean.com/e/cash-shortage-not-turning-the-crank-fast-enough/

For blog and article writing, tutoring and speaking on investments and finance, contact me here:

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies (2015)
 (amazon author page) amazon.com/author/kenboyd 
(cell) (314) 913-6529
(website) www.stltest.net
(you tube channel) kenboydstl
(podcast: website link and on ITunes)
https://itunes.apple.com/us/podcast/accounting-accidentally/id911793420 
(facebook) St Louis Test Prep
(twitter) @StLouisTestPrep
Author: Lynda.com
Instructor: Financial Times/ ExecSense Webinars

Image: Vintage Radio by Cuba Gallery. Creative Commons license