Debt and Operating Costs

Learning Goal: I’m working on a criminal justice discussion question and need support to help me learn.

Respond to the following in a minimum of 175 words:

• Locate and share a link to an article that discusses the issues of debt and operating costs in a business.
• Describe your takeaways on how debt and operating costs were addressed.
• Detail any of the following types of debt mentioned in the article:
• General obligations and revenue bonds
• Certificates of obligation
• Contractual obligations
• Commercial paper
• Capital leases
• Notes payable
• What recommendations would you have for this business to improve their budgeting situation?

Respond 2 replies to classmates or your faculty member. Be constructive and professional. 100 words each

1)I’m sure we’ve all heard of the once popular retail toy store Toys R Us, and how it went bankrupt, and ultimately out of business.

My takeaway on Toys R Us’ situation is that the company did not handle their financial debt wisely. The company’s leaders premature decision to file for bankruptcy is what accelerated the company to collapse. According to an article written by Ben Uglesbeen, creditors to Toys R Us claim that company leadership should have never approved its bankruptcy financing in the first place. “Allegations emerged against former executives and board members of Toys R Us, who approved a loan deal meant to finance the company through its bankruptcy and a turnaround, but which ultimately triggered a collapse of the country’s last national toy store.”

Personally, I would recommend any business, especially a business in retail to cut down in size and adapt to the times of today. Failing to adapt and cutting down in a variety of ways, doomed Toys R Us, as well. Down sizing helps cut costs and it benefits your, company’s budget. I would also recommend for every business to improve their online shopping experience, as part of adapting to the new ways of shopping and seeing it as an opportunity to cut costs by eliminating the need of property leases.

2)Like most businesses that rely on travel, Hertz was hit particularly hard during the Pandemic. However, of the major car rental companies, Hertz was the only one to resort to filing for bankruptcy. Unlike Enterprise and Avis, Hertz did not have as good of a financial cushion because it had used funds to purchase other companies and expand its business (Ferris, 2020). Hertz had about $19 billion in total debt it filed for chapter 11 bankruptcy, with most of it in the form of lease obligations issued against the purchase of cars (Indap, 2020). A huge problem for Hertz during the Pandemic was they borrowed against their assets, in this case, their vehicle fleet in the form of capital leases. This tactic is usually pretty safe for a thriving business with continued revenue flow that services the debt. The assets also normally hold their value as collateral so they can be liquidated if needed to pay off debts. Unfortunately for Hertz, the Pandemic hit them both ways by strangling their revenue flow due to the lack of travel, but it also caused the used car market to lose massive value, destroying the value of their assets.

In June 2021, Hertz emerged from chapter 11 bankruptcy in just 13 months. The return to travel and increased prices in the used vehicle market stimulated the financial turnaround. Thanks to a vehicle shortage, the rental car market is thriving and used vehicle values have skyrocketed, reducing the overall debt and general obligations Hertz has (nytimes.com, 2021).

Hertz is doing well in improving their budgeting situations on their own. I would suggest they continue to evaluate their fleet size to compare the value of the fleet versus the revenue it provides. When used vehicle values are inflated, it may be more beneficial for the company to thin its fleet further and capitalize on the high vehicle values as long as it doesn’t affect the availability of rental vehicles and reduce its revenue.