Even seemingly thriving and “profitable” companies can occasionally fail. Many companies are forced to declare bankruptcy when they do not have the cash to meet their everyday expenses. Recall that net or gross income is calculated by subtracting the total expenses from the total revenue. In the case of American Apparel, their revenue remained relatively stable in the years of 2008, 2009, and 2010. However, beginning in 2008; expenses incurred by American Apparel began to outpace the rate of growth experienced by its revenue. As a result, the company suffered greatly reduced income and eventually a substantial net loss of $86.32 million in 2010. Liquidity of assets is a crucial point to many businesses. It does not matter how profitable your company is; the bottom line is that if you don’t have enough cash to quickly cover the needs of your operations, creditors will be waiting at your door to tear you to bits.
Take a look at the recent financial statements (cash flow statement in particular) – with 14 million injected into the company right away, how should the company allocate this money? Into which activities? And why?
As of 2010, American Apparel is receiving most of its cash flow from financing activities. Operating activities, the bread and butter of clothing companies such as American Apparel, suffered a net negative outflow of in excess of $32.0 million. In recent years, American Apparel has earned large amounts of money through the selling of their merchandise. The negative outflow of cash regarding operating activities seems to suggest that consumers are no longer interested in purchasing products of American Apparel. There is a lot that a company can do with a cash injection of $14.0 million. In my opinion, American Apparel should use this money to develop newer products that customers feel inclined to buy.
website from which I got financial statements of American Apparel
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