http://www.vancouversun.com/sports/Canwest+creditor+protection+extended/2877691/story.html
----- an extension to remain under court-protection from creditors
Summary:
In the early January of this year, one of Canada’s biggest newspaper publishers was forced to declare bankruptcy. The main reason that caused the bankruptcy was CanWest Company cannot pay off its debts. A letter was send to their creditors saying that the company “profoundly disagrees” if their newspaper chain is pushed against “early filing” then this could harm the relationship between the company and suppliers. CanWest suffered $40 million revenue loss for the past three months and no it is under the bankrupt protection plan held by the government. Their debts reach $1.4 billion as of the beginning of April. Realizing the company could not pay back their creditors, they reach toward the court for help. CanWest was given a deadline for them to sell their company to bidders to obtain cash so they can repay the creditors. The deadline was said to expire on Wednesday but the Court granted an extension for them to finish their sales process. The Bank of Nova Scotia took the lead and put in $950 million floor bid to acquire CanWest. The assets will then be change to a new entity and take the “new firm public”.
Connection:
In chapter 5, we were introduced to the Cash Flow Statement and its importance in the business. Using the Cash-to-cash-cycle, we are able to analyze why the company would encounter bankruptcy. One of the biggest problems that companies face bankruptcy is because lack of cash on hand. CanWest was a daily newspaper supplier so their revenues based on the subscription and sales of the newspaper. For subscription, before revenues are collected they are mostly recorded as accounts receivable. Therefore, the lead/lag relation comes into place. The company does not get money immediately through the purchase of the newspaper but instead they must wait for the newspaper to deliver and the transaction will go through. This creates a period of time where they do not have sufficient funds to buy inventory and repay their creditors (the process of Operating). Consequently, they will go to get a line of credit and procrastinate the interest payment to later day. After a period of time, the company’s revenues could no longer support the expense associated with it. This is what results in net loss and the loss of $40 million in revenues.
Reflection:
Newspaper and magazines are becoming necessities for our lives. This is why newspaper publishers are making millions of dollars of consumers every year but why is CanWest bankrupt? I think that when they are not sure that the subscription system will or will not be able to bring them sufficient revenues they should start to reduce the accounts receivable and shorten the lead/lag period. Also, CanWest should try to slow down the growth rate because it is easier to play safe and earn the revenues in the long-run; rather than taking the risk and borrow money from the bank. This taught credit owner a lesson, interest payments will build up over time and if an individual only pay for the minimal payment the debt will continues to grow so it is the best to pay the creditors as soon as possible to limit the consequences of bankruptcy.
Tuesday, April 13, 2010
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You are right that newspapers and magazines are becoming necessities in our lives, and that is why CanWest has many competitors. They don’t want to harm their relationship with the suppliers because it might affect the company’s long-run potential. I understand it would be hard for CanWest to reduce the lead/lag period. I think CanWest is suffering both cash flow challenges and not being profitable. They should have noticed the problem earlier because they are not even making enough revenue to cover their expense and debt; therefore resulting in a net loss and not just simply cash flow problem. CanWest should see the problem on the income statement and on cash flow statements. I think CanWest needs a better accounting management to beware of their crisis that they are suffering now.
ReplyDeleteVanessa Lo
Financial Accounting 12
D1P2
I agree with Vanessa’s opinion, in that newspaper companies like The Vancouver Sun are facing stiff competition from free newspaper, such as the 24 Hours and the Metro. When the economy takes a turn for the worst, people are less likely to spend money on things like newspapers, when they can get them for free easily. It is when newspaper publishing companies are continuing to print the same number of copies when no one is buying, that they run into trouble, not subscriptions problems. Subscriptions for newspapers are much like subscriptions for magazines. Customers pay, in this case, for a subscription lasting 6 months, but they pay this set fee all at once, in the beginning. There is no lag/lead relationship of 6 months, as customers do not pay gradually over time. Even if subscriptions are monthly, customers pay at the beginning of the month, not the end. To be safe, I think CanWest should print fewer newspapers daily, until newspaper sales go up again. This however, may not create enough sales to earn a profit…
ReplyDelete"CanWest should try to slow down the growth rate because it is easier to play safe and earn the revenues in the long-run; rather than taking the risk and borrow money from the bank."
ReplyDeleteThat's a very good point you made there. Often times, companies fail because they always focus on the profit that meets the eyes at that very moment in the market, rather than being more careful and planning out how the company will make profit in the future. We can see that CanWest's debt reached to 1.4 billion dollars, and that is because they didn't make the effort to pay off their debts right away. This just shows how CanWest only worried about the company's performance at that time, and didnt care to make plans to even pay off their debts in the future.
The exact same reason caused the whole recession back in 2008. US banks just only cared about lending money to a borrower because they thought that the more they lend, the more money that would be paid back to the bank later on in time. They didn't think of the future. They didnt even plan out the risks of lending money to someone who has no money. That is what caused the recession.