204 - What a Tesla Bankruptcy Can Teach You About Personal Finance

On today's show, recorded in July, 2018, I give my thoughts on what the bankruptcy of Tesla Inc., the electric car company, can teach us about how we manage our own personal finances.

And yes, I realize that Tesla is not (yet) bankrupt, and in fact they have a market value of approximately $50 billion (in US Dollars), which is comparable to the market value of General Motors, so on the surface it appears that everything is going great at Tesla.

Perhaps, but looks can be deceiving.

Is someone who drives a new car successful?  Perhaps, or perhaps they are leasing it, and can't afford the lease payments.  Outward appearances do not tell the entire story.

When I use my skills as a chartered accountant and Licensed Insolvency Trustee to analyze Tesla's financial results, I see the same warning signs that I see with my clients just before they file bankruptcy.  What are the warning signs?

First, negative cash flow.  At the moment, Tesla has a negative cash flow from operations of over $100 million per month.  My clients have a similar problem, although obviously with much smaller dollars.  My average client has around $300 available each month to pay their debts, but their average interest costs alone are over $900 per month.  They, like Tesla, have a negative cash flow, and can only stay afloat by further borrowing.

Second, Tesla has bad Liquidity Ratios.  They have more debt than assets, so, as we accountants say, they are not "liquid".  If you have $800 in the bank but your rent of $1,000 is due today, you are not liquid, and that's the exact same issue Tesla is facing.

There is another attribute that my clients and Tesla have in common: they won't give up without a fight.  Elon Musk, the CEO of Tesla, is working hard; he's even building cars in tents to meet production targets.  My clients often take on second or third part time jobs to make ends meet.  I admire a fighting spirit, but there comes a time when you have such an overwhelming level of debt that a bankruptcy is the only logical option.

My advice, in that case, is to reach out for help.

(Sorry Elon, I only help people, not companies, so you are on your own).