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:

http://money.cnn.com/2014/09/11/investing/radioshack/index.html

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 2^nd 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

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Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies (2015)

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