What is a Cash Charge
BREAKING DOWN Cash Charge
Investors need to distinguish between a cash charge and a non-cash charge, because they have very different ramifications for a company’s financial health and valuation, even though they both reduced net income.
A cash charge appears as an extraordinary expense in the company’s income statement, and reduces net income, just like a non-cash charge. The difference is that a cash charge is accompanied by a cash outflow, which reduces the company’s cash position, whereas a non-cash charge — used in accrual accounting — such as depreciation and amortization, represents an accounting charge. Examples of non-cash non-recurring charges include asset impairments, stock-based compensation and changes to accounting methods. Both forms of charge can have a meaningful impact on a company’s financial standing and short-term capital needs.
Cash charges and asset impairments often occur when a company incurs expenses when it is restructuring, downsizing and improving its operating performance. For example, a company might make a cash charge against earnings to provide early retirement packages to higher-paid employees. An initial cash outlay is required to fund the retirement packages, but the expected cash savings measures implemented through reduced salary liabilities rationalize the upfront expense.
Beware of Improper Use of One-time Charges
Because one-time charges should not reflect on a company’s financial performance, many companies treat them as non-recurring events and report pro-forma earnings that exclude the impact of such charges. Investors should watch out for companies that record charges that they repeatedly incur in the course of their usual business activities as one-time charges, in order to flatter the company’s financial health on a pro forma basis.