I don't see anyone here talking about how payment terms times volume generates working capital. Or, in other words, the more cars they make, the less money they need.
Let's try some math.
If we lump all costs of the car into "supplier payments" due in 60 days. Say a car costs $30,000.
And we say it takes 20 days to build the car, and 30 days to receive payment. (50 days) And you sell it for $40,000.
Each car you build burdens you with 10 days of $30,000 in working capital and $10,000 of gross margin.
If you make a car 36 times a year (360 days / 10 days), you hold the $30 K for a full year. (And pocket $360,000)
But they are not making 36 cars a year, but rather more like 360,000 cars. So we need to add some zeros... 4.
So you hold 300 million dollars and pocket 3.6 billion dollars. ( I think the math is right, but it is late here).
Let's see what happens if it only takes 10 days (instead of 20) to build the car, so one car gives you 20 days of $30K working capital. Now you have to deal with 600 million dollars of extra cash.
If you can get paid in 20 days, you are stuck with about a billion dollars in working capital.
But this is brittle. If there is friction in the sales process, like, say, you trip up your customers by demanding $1000 if they refuse to worship the car by washing a black car everyday - now you have introduced a religious argument to your sales process. That adds 10 days to the sales cycle, or more, because they have to pray about it - good stewardship of money and the environment are now in conflict.
Suddenly a billion dollars in working capital disappears, "Poof!"
All because, in pursuit of margin, you added friction and religion and manipulation and control, and all the things that would cause a wife to divorce you, to a sales process, because you have some vision of a smooth running line making a lot of black cars, where in fact, for star-belly reasons you are making almost zero black cars (only for fleet sales, because you don't respect the customer's resale value the way Honda does).
Anyway, if you focus on making time delays small rather margins large, money shows up on your doorstep and green vehicles show up on customer's doorstep. Everybody is happy. It is no longer zero sum.
