7-2 FIN Acct

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Tesla Analysis

Evelyn Aponte

March 31, 2022

Outline:

· Tesla Inc – Its business

· Importance of financial statements

· Importance of cash flow management

· Case study on cash flow management

Tesla Inc is engaged in the business of designs, development, manufacture, lease, and sale of electric vehicles, and energy generation and storage systems globally, primarily the United States and China. It also offers vehicle service centers, supercharger station, and self-driving capability. It sells its vehicles through direct and used, and offers financing and leasing options. It also offers non-warranty after-sales vehicle services, retail merchandise, and vehicle insurance. Design, manufacture, installation, sale, and leasing of solar energy generation and energy storage products, and related services is also a part of its business. For these products as well, it offers service and repairs, including warranty and various financing options to its customers. The company was founded by Jeffrey B. Straubel, Elon Reeve Musk, Martin Eberhard, and Marc Tarpenning on July 1, 2003 and is headquartered in Palo Alto, CA.

Financial statements act as a gauge to understand the health of a company. They are crucial to an entity as they serve as a tangible proof to the claim as to how a company is functioning. Its role in understanding the current financial health of an organization is well indicated in the below points:

· They offer a clear picture of profitability and financial position of an entity for a given period.

· They offer an understanding of the operational efficiency of the business.

· It helps the entity appropriately classify revenue and expenses that pertain to a particular period. When they are based on accrual concept, instead of entire receipt or payment, what effects the profitability of a period is only what accrues during that period.

· They help in taking important decisions as a clear picture of resource availability is on

· Its displays the exact values of the assets and liabilities. For instance, assets are shown at a value they actually represent by appropriately deducting depreciation.

· Whether the business is financed by equity or debt or a mix of both, financial statements present a clear picture of how the funds sourced are being utilized in the business.

· What business owes is usually known but financial statement help us understand what portion of debt is due in the near future. Similarly, of the total receivable, an entity can clearly see what can expect to receive in the near future.

· The shareholder’s equity component helps a business identify the worth of owner’s share in the entity.

· Major financial decisions like declaration of dividends can be made more effectively with the help of financial statements that show a clear picture of the reserves at the reporting date.

Cash flow management is crucial to a company’s financial health. The management needs to closely monitor and employ effective policies for cash flows. Right from collection from sales, payment for related expenses to raising capital, capital expenditure, all decisions have direct impact on a company’s credibility and performance. Cash monitoring is highly significant. This is why a separate report solely reflecting cash inflow and outflow forms part of financial statements of an entity which is named as ‘cash flow statement.’ This statement aptly tracks cash flow from operating, investing and financing activities. A user can easily understand the source of cash and where exactly it is being absorbed. A U.S. Bank conducted a study and discovered that 82% of the time, poor business cash flow management or poor understanding of cash flow contributes to the failure of a small business (Jessie Hagen, cited on the SCORE/Counselors to America’s Small Business, 2019)

A recent example of cash flow mismanagement leading to business failure is the case of Patisserie Valerie. The company operated a chain of cafes in the United Kingdom with over 200 stores. It has been a popular brand with number of cafes at prominent locations. The management failed to maintain appropriate levels of cash. The company went into administration in 2019 as the worsening cash situation forced company to undertake major accounting misstatement including concealing of overdrafts accounts of up to £10m. the profit and cash flow situation had been overstated to show a healthy financial situation which was actually false.

Mismanagement of cash flow led to an unsecured, interest-free loan from owner of £3m to help ensure that the wages are paid. As debt became due, the talks with two of its bankers failed and its debts became overdue. There had been quite a few cash injections from its equity investors as well before ultimately accepting in a stock exchange statement that it doesn’t have sufficient funding to meet its liabilities as they fall due. The funds the company could secure had only helped it pay off a section of what was overdue. It had become solely dependent on external cash injections to survive. Ultimately, the company had to close 70 of its stores. It had to cease trading of its stocks.

In case Tesla decides to further improve its financial health they can use the following short term financing options: a small business loan to finance salaries, materials, and other daily operations. Invoice financing, using unpaid invoices to get cash from a lender. Last, a line of credit in case sales become unsteady and cashflow injections are needed to throughout unpredictable times in the year to continue operations. Equity finance, issuing more shares to the public. Short term financing is a good way to increase cash quickly without long term commitments (Wood 2020). However, short term financing usually comes at higher interest rates and more frequent payments as well. I would recommend a line of credit for Tesla just in case there are turbulent times ahead caused by macroeconomic factors. Overall, Tesla seems to be a healthy company with a perhaps overvalued stock, but only time will tell.

Thus, cash can be truly called a lifeline of the business. While its mismanagement can create chaos, proper management can help a company secure further cash inflow as lenders base their decision on the financial health of a company.

Project Two

References

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Bloomberg. (2020, January 7). How Elon Musk Built a Tesla Factory in China in Less Than a Year. Fortune. https://fortune.com/2020/01/07/elon-musk-tesla-gigafactory-shanghai-

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Ganti, A. (2021, May 19). What Is an Equity Multiplier? Investopedia. https://www.investopedia.com/terms/e/equitymultiplier.asp.

Wood, M. (2020, October 13). The Best Short-Term Finance Options for Business Owners. https://www.fundera.com/business-loans/guides/short-term-finance.

Mergent. (n.d.). Tesla Inc [NMS: TSLA]. Retrieved MAY 28, 2021, from https:// www.mergentonline.com/login.php