Cash flow is one of the most important definitions in financial management, yet, it is hardly mentioned and analyzed, compared to other principles.
In fact, cash flow is a financial term that originated from the accounting/ financing sector, which is a complicated definition for some people. However, its functions and roles are undeniable.
In previous blog, we have provided the overall information and highlighted the benefits of cash flow for businesses. In this article, GCT Solution - a renowned defi development company in Vietnam, will provide a case study of Amazon's cash flow to help you better understand this intricating term.
In the previous blog, we mentioned these three typical scenarios. In short, they are:
In this article, we will analyze the case of Amazon, which falls into the first case: cash inflows come after cash outflows. Let’s go into detail!
Amazon is an interesting business case because the two main lines of business are Amazon Retail - Ecommerce-related and Amazon Web Service, which are two completely opposite examples of cash flow.
With Amazon Retail, which is more specifically the original model of Amazon - 1st party, it can be considered the typical case call money in before money out.
In this model, users will immediately pay Amazon for purchases online, however, Amazon only has to pay the supplier for purchases 30-60 days later. Amazon can be considered to have a huge short-term loan during this time to be able to use it at will. This amount is commonly referred to as “float”.
Compare Cash Cycle Conversion between Amazon, Costco, and Walmart. Source: HBr
Look at the comparison of “cash conversion cycle” between Amazon and traditional retailers to see the huge difference in cash flow.
Cash conversion cycle - the speed of the business's cash turnover. If you run a supermarket, it's the time between when you have to pay the supplier to buy the goods, and the time you can get the revenue back when the user buys on the shelf. The shorter the Cash conversion cycle, the better, it represents a business with a short inventory period - you don't get buried for long, so you can turn around the money quickly to reinvest.
With Walmart, this figure falls somewhere around 10 days on average, with Costco, it's even lower, only about 3-4 days. That is 2013 data, so far Walmart's cash conversion cycle has dropped to 6 days, and Costco's is only a full day. Whatever it is, this one-digit cash conversion cycle is extremely impressive. It represents the efficiency to an almost optimal level of these supermarket chains in operation as well as anticipating the needs of customers.
However, all of these numbers are blurred when compared to Amazon. Amazon's Cash conversion cycle is currently negative for 31 days. That's an average of one month after receiving money from users, Amazon has to pay for goods to suppliers. This may sound normal now, but at the end of the '90s, when e-commerce was just starting to take shape, it was a revolution. Michael Mauboussin, one of the most famous analysts at Wall Street at the time (and now) was so excited that instead of calling it amazon.com, Wall Street should call Amazon cashflow.com.
Compare Cash Cycle Conversion among major US retail chains in 2021. Source: Finbox
Essentially in these 30 days, Amazon has a “free loan” that it can leverage to continue pumping into its growth efforts, Jeff Bezos understands Amazon's advantage and resolutely uses it radically in Amazon's expansion strategy.
Imagine you are a traditional retail chain with cash flow that is always limited because you always have to pay the supplier first => and always bury capital click inventory. Because of the lack of cash, to expand you are forced to go out to call - probably through debt financing or equity financing. Either way, in order to have access to that capital you will have to pay a price - interest or dilute shares.