Management Accounting

GM Speeds Up Checks to Suppliers, Government

The carmaker says it will be able to pay off its debt to the U.S. Treasury faster than expected and aims to keep cash flowing smoothly through its ...
Sarah JohnsonNovember 16, 2009

General Motors will be paying suppliers more regularly as the postbankruptcy version of the company seeks to grow and eventually become publicly traded again. Doing so will “smooth out the cash-flow portfolio for our supply base as well as smooth out the cash-flow portfolio for us,” said CFO Ray Young during a conference call Monday. “We’re trying to work constructively with our supply base to find ways to help them even during these particular challenging times.”

The changes involve paying suppliers on a weekly basis rather than the first week of every month, and keeping the carmaker’s payment terms to 47 days. A year ago, GM extended its payment terms to companies that supply some of its services to 60 days. At the time, as reported, some companies that relied on GM as a major customer complained that GM’s stretching of its payables was wreaking havoc with their own working capital.

In fact, when Young made projections during bankruptcy proceedings about how he thought GM’s finances would look once the company emerged, the supply chain was a huge question mark. “We weren’t sure whether a lot of suppliers in North America would be able to support the production ramp-up of GM and Chrysler,” he said.

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On Monday Young and CEO Fritz Henderson, GM’s former CFO, showed that their early projections were slightly pessimistic — allowing the executives to claim the company will make progress sooner than expected (although for the time being, it is keeping its inventory levels low). GM also got a public-relations boost by being able to show it will begin paying down its debt with the U.S. government sooner than projected.

Monday was the first time since emerging from 83 days of bankruptcy protection over the summer that GM has updated investors on its financial status; the company posted a $1.2 billion loss for the period between July 10 and September 30. It generated $26.5 billion in revenue during that time period.

Moreover, GM announced it will begin to make a dent in the $6.7 billion it owes to the United States in addition to $1.4 billion owed to Canada. The company claimed its “healthier cash position” — with $42.6 billion in cash as of September 30 and $3.3 billion in cash flow — will allow it to pay down the debt starting next month. GM will use escrowed funds to make quarterly payments on these loans until they’re paid off — which could happen by June, said Henderson. “Our liquidity position, candidly, is well in excess of what we would have thought going in,” he said.

However, GM executives cautioned that while the numbers look better than they had expected, some key figures will likely fall in the fourth quarter. In addition, none of the numbers were calculated in accordance with U.S. generally accepted accounting principles, but were rather presented as “preliminary managerial results.” In other words, GM has evaluated its assets and liabilities on a historical cost basis; it has yet to value them according to fair-market prices, as required under “fresh start” accounting rules.

GM expects to have negative cash flows next quarter after paying $2.8 billion for Delphi, its former parts supplier that recently emerged from bankruptcy protection; paying down the government loans; and recording continuing restructuring costs. In effect, GM said, its cash balance will be “materially lower” than the $42.6 billion it predicts to report for its Q3 10-Q.

GM will begin formally updating its financial statements with the Securities and Exchange Commission next year in preparation for an eventual initial public offering. Henderson said he expects the company will be prepared to file for an IPO in the second half of next year.