Cash Flow Banckrupcy
This week we covered Chapter 13, Statement of Cash Flows. This is the financial statement used to analyze the cash flow of a company. Why is cash flow important to a company? Research a case where a company went out of business or declared bankruptcy due to poor cash flow and not lack of sales, then summarize it for your initial post. It is not allowed to use the same company as a student from a previous post in Week 7.
Please make an initial post and two replies to either your classmates or professor. The initial post must be at least 250 words with one external reference in APA format, while your replies must be at least 100 words.
View your discussion rubric.
Week 7 Discussion
One company that comes to mind that went bankrupt is Toys R Us. Toys R Us was founded in 1952. In the early 2000s, Walmart and Target were beginning to lower their prices on toys and especially during the holiday seasons and Toys R Us sales were declining at a high speed rate. Soon enough, Walmart was selling more toys than Toys R Us was and becoming a bigger threat. Once the investors realized how serious the situation was, they decided it was time to sell the company. In 2005. KKR and Bain Capitol bought Toys R Us for over $6 billion, but they did not purchase it with equity. They used Toys R Us’s own assets to buy the company. The buyers only put in $1.3 billion and used the company’s assets of $5.3 billion in even more debt. This brought the total debt of the company to $6.6 billion and 82% of their total capitol. They wound up paying approximately $450 million of cashflow per year to pay on the debt.The buyers wanted to lower operation costs and sell some assets to raise cash. The new owners were so focused on Walmart and Target, they did not take notice how big Amazon was getting and ecommerce in general. Since they did not take the time to build up the company’s online presence, the cashflow drained due to the enormous amount of debt and the company had to go bankrupt.
Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs. Positive cash flow indicates that a company’s liqiud assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing. Cash is the lifeblood of a business and a business needs to generate enough cash from its activities so that it can meet its expenses and have enough left over to repay investors and grow the business. While a company can fudge its earnings, its cash flow provides an idea about its real health. By generating enough cash, a business can meet its everyday business needs and avoid taking on debt. That way, the business has more control over its activities. In a situation in which a business has to take on debt to meet its expenses, it is likely that its debtors will have a say in how the business is run. If they have contrary opinions to the management’s, that could be an impediment to the way management executes its vision for the business.
Radio Shack is a company I remember that went out of business. From my research it shows that the company filed for Chapter 11 bankruptcy in February 2015. This was because of several financial and operational missteps. I remember Radio Shack and recall when the store cloed but I never really wondered why until now. It is almost as if they could not keep up with technology. There were several reason listed. I shared the link below.