GM Must Slow Cash Burn, to Last Past February

The cash emergency at General Motors has been brewing for a year, since GM starting burning up more cash than it was taking in. Before than, GM had built up its cash reserves five out of the previous seven quarters.

The downturn in U.S. truck sales has been GM’s particular undoing. GM capacity utilization fell to 78.8 percent in the third quarter, down from 84.5 percent a year ago. That is, GM built less than 80 percent of the cars and trucks it has the capacity to build. Sure, it takes money to build vehicles, but production represents revenue, even if margins are thin. Unused capacity represents a huge financial burden with no offsetting revenue.

 GM reported on Nov. 7 it had $16.2 billion in cash and equivalents at the end of the third quarter, only a little more than half of its recent peak of $30 billion, a year earlier.
Meanwhile, GM said in September it needed a range of $11 billion to $14 billion in cash to pay suppliers and run its monthly operations, not counting capital expenditures on plants, land and equipment.

The math pretty simple: GM has $13.8 billion less than it had a year ago. Divided by 12, it’s burning through cash at an average rate of about $1.15 billion per month. At $16.2 billion, it has about $5.1 billion more than the minimum it says it needs. At an  average burn rate of $1.15 billion per month, it only takes GM about 4.4 months to use up $5.1 billion.

It’s no wonder GM is warning it will run short of cash in the first half of 2009. At the average cash burn rate for the last year, it would be more like February 2009 – however, GM is counting on slowing down the rate at which it’s going through cash, by cutting expenses and postponing new-product programs.

GM concluded: “Immediate federal funding is essential to help the U.S. auto industry survive (this) downturn.”