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Sergio’s debt aversion, explained

by David Zatz on

Bloomberg recently ran a story which may explain why FCA’s chief executive, Sergio Marchionne, has such a fervent desire to pay off debt, postponing new-vehicle development to reach his goals.

In essence, it has to do with how quickly the company pays vendors. Different companies pay their bills in vastly different timeframes, varying from almost instant payments to year-long delays. When interest rates were high, slow payments were a boon; they let cash-positive companies earn revenue from “the float,” and let debt-heavy companies avoid some interest payments.

The down side is that, if revenue suddenly falls, the company is faced with paying past bills for a while. That could mean drawing deeply on lines of credit, since less money is coming in but the same amount of money is going out.

FCA tends to let debts sit a while before paying them off—which means that, if revenue suddenly slumps, the company will be faced with large bills for past purchases for some time.

In essence, this article notes that FCA needs a greater cash reserve in case revenue falls, because it pays vendors slowly, and will have to keep paying them even when revenue stops coming in. It’s just one more reason FCA is working so hard to make that “no more net debt” goal in 2018, sacrificing product and market plans to get there.

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