John W. Schoen Senior Producer • Profile • E-mail

Last week's stunner by auto maker Ford that it lost $12.7 billion last year has a number of readers, including Joe in Mississippi, wondering: how can it keep losing all that money and stay in business? Carol in Oregon is trying to figure out when interest rates on CDs will head higher again.


Ford Motors lost $12.7 billion in 2006. They expect to lose $-billions more in 2007. How do they stay in business and where does all this money come from?
-- Joe, Oxford, Miss.

In a lot of ways, corporate finance is not all that different than your household budget. The numbers are just a lot bigger. So let’s imagine that Ford is a typical American — call him Otto Mayker — sitting at the kitchen table trying to figure out how to pay his bills.

Otto has a good job in an established business where everyone knows his work. But lately, he’s been losing assignments to younger, overseas competitors, so his bonus has suffered. He still makes a decent living. His income had been going up recently — from $165,000 in 2003 to $177,000 in 2005 (just add six zeros to get Ford’s numbers.) But he had a lousy year in 2006 and only made $160,000. Even though his income went down, his annual costs – taxes, mortgage, household expenses, etc. – didn’t fall as far. So he spent about $12,700 more than he made last year. 

But the drop in his income didn’t come as a big surprise: it was easy to see his monthly numbers were off. So he began cutting expenses last year (as did Ford). He and his wife don’t going out to dinner as much. He’s postponing buying that big screen TV she’s been bugging him to buy for this year’s Super Bowl. And he told the landscaper not to come around any more; he’ll cut his own lawn. 

Because he knows his business has its ups and downs, Otto has saved up a pile of cash over the years. Even after last year’s shortfall, he’s got $34,000 in cash, bonds and other investment (as does Ford) he can tap quickly to pay bills. Since knew his savings were going to take a hit, he recently took out a second mortgage on his house (in Ford’s case, some factories). If things get really bad he can always ask for a loan, but when the banker gets a closer look at his financial situation, he probably won’t get a very good interest rate (Ford’s borrowing costs also go up when it’s credit rating goes down.)

Because Otto has seen his bonus go up and down in the past, he’s hoping he’s just hit a bad patch. It’s happened before. Back in 1992, just after a recession, he came up short by nearly $8,000 for the year (as Ford did). The way things are going now, he figures he may need to shell another $17,000 in cash (so does Ford) before his income covers his costs again with enough left over to start putting money back into his savings.

Still, his neighbors are a little worried about him. The guys at the country club are going around saying he overspent by more than anyone in his company in the last 103 years. While that’s true, the $12,700 that Otto (and Ford) “lost” last year – adjusted for inflation – it would have been more than 20 times that amount in 1904. As a percentage of Otto’s annual income (or Ford’s total annual revenues), it’s not quite as scary.

Still, Ford’ losses for 2006 were huge, and they’re not sustainable. Companies can cover losses from the corporate piggy bank for a time, but if they lose money year after year, they end up in bankruptcy court along with a bunch of airlines. So Ford can buy some time, but it has to move quickly to fix its basic problem — it’s not taking in enough money selling cars to cover its costs. Cutting those costs, which Ford is doing, is half the solution. Now the company needs to build cars at competitive prices that people want to buy.

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