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).
Check out my podcast on this subject:
http://accountingaccidentally.podbean.com/e/cash-shortage-not-turning-the-crank-fast-enough/
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
(email) ken@stltest.net
(website) www.stltest.net
(you tube channel) kenboydstl
(podcast: website link and on
ITunes)
https://itunes.apple.com/us/podcast/accounting-accidentally/id911793420
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Image: Vintage Radio by Cuba Gallery. Creative Commons license
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