Tesla – How Accounting Can Make a Difference

Unless you’ve been sleeping under a rock for the past few weeks, you’ve seen and read all the excitement about the Tesla Model 3 and its recent pre-order count at 325,000 (US News) for a car that is slated to be delivered in late 2017 (read most likely 2018).   Now that is amazing given BMW sold 95,000 3 Series cars in the US last year.  There are a number of other items which weigh for Tesla other than delivery, such as the availability of the 7,500 Federal Tax incentive to consumers.  This tax credit was meant for just the first 200,000 cars a manufacturer makes.  With the Model S, X and original Tesla they have not hit that number yet, but most certainly with the pre-order numbers they will at some point soon.

So How does this affect Tesla as a company?  

Well there’s been a lot of news of the negative cash flow and whether TSLA can remain afloat given their cash burn.  I’m obviously not an analyst, nor am I here to talk about whether the stock is a good deal or not, what is certain is the buzz and excitement around a car company that has never made money, has incredible brand loyalty like AAPL, and has a pre-order for a product that is unprecedented in the auto industry.

Accounting can make a difference

So many of us are familiar with the two ways we can account for flows in business – accrual and cash based.  Cash is simple it is literally what comes in and what goes out as being recorded the day it happens and is reflected in the financial statements immediately.  Accrual is registering the income or expense whether or not there is any actual cash in hand.  Now let’s look at 325,000 in pre-order sales for Tesla.  If we use a simplified cash accounting for this we have a down-payment of $1,000 for each car or $325,000,000 in cash received.  Not too bad for a week or so of promotional sales.  Now keep in mind these are fully refundable deposits and the actual cost of the car with a typical set of feature upgrades will push that to ~$42,000.  This of course cannot be recognized in cash accounting, however in accrual based accounting we could recognize the entire sale of the $$35,000 – 42,000 with the pre-order down payment or $13,650,000,000 (42,000 x 325,000) in revenue for the year.  Now granted this is over simplification of an accounting concept, but something to keep in mind as to how an accounting basis can make a huge difference to financial statements.  FYI – most large companies operate on accrual and most small businesses are cash for simplification.

Cash Flow still affected

One piece which cannot change however, is the amount of actual cash flow for a business or actual cash on hand.  We help a lot of small business owners with this challenge of managing cash flow in reflection to their actual accounting or tax planning.  Cash is king for small business owners and actually quite different for large publicly traded companies.  Case in point Tesla can still get investors to give them money, pay premiums for their stock, yet not make a penny.  If a small business went to their local bank for a loan with consecutive negative years of losses – Good Luck!  So you still need cash to run a business even if you recognize revenue far in advance of actual cash receipt.  This is potentially where loans, lines of credit, etc can come into play and help cover cash flow drain.  For small businesses this might look like a shareholder loan, capital call, or financing from an institution also.

So?

Well this article was just an example of how accounting can have an impact to a public company.  Small business owners don’t have the same kind of breadth and ability of such a large entity, but there are a number of great tricks of the accounting and tax planning trade which can benefit the local entrepreneur.  Accounting can be a complicated space, but when used appropriately and with prudence can greatly benefit businesses of all sizes.

 

Viridian Tax and Accounting helps small business owners with their tax planning, preparation, accounting and financial planning needs.

 

 

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