Amazon is well known for rapid growth but relatively low profit – its founder Jeff Bezos famously asking shareholders to sacrifice this year’s profits in order to invest in long-term customer loyalty and product opportunities that will create bigger profits next year and for years to come.
But the real story behind Amazon’s ongoing growth is shown not so much by its profits, which dipped in 2012 after a few years of growth and have yet to return to 2010 levels, but by its cash flow.
Every small business knows that “cash is king” but it’s somewhat of a surprise to see larger companies paying quite so much attention to it as amazon clearly do.
Amazon’s strategy hasn’t been about profit, it’s been about growth, and the reason that amazon has been able to grow so dramatically into many different areas in recent years is that they have the operating cash flow to do it. I’d recommend the HBR article for the details, but long story short? Amazon, just like a small business, have held profits low by reinvesting much of their free cash in growth – and have boosted the availability of that free cash.
With such a strong position in the minds of customers, Amazon are using their ability to shift a high volume of product to negotiate very long payment terms with their suppliers. As a growing profitable company, their credit is good of course, so in return for access to volume (and many other benefits) suppliers are putting up with very long payment terms – quite simply it’s worth it.
Can your business start the virtuous circle that Amazon have found? Good cash flow fuelling growth, fuelling good credit, fuelling good cash flow? Or are you extending credit where credit’s not really due?
It might be time to take a leaf out of Amazon’s book.
Or at least some reading from the excellent hbr.blog
I came across this little meme recently, reflecting the school of thought that says, in effect, that happiness cannot be achieved as an objective in and of itself. This may challenge the American Declaration of Independence, by implying that the pursuit of happiness might be counterproductive but it does provide a simple explanation as to why, having been persuaded by advertisers that we should by the latest gadget/game/car/trinket in order that we are happy, we then find that we’re disappointed.
I was then struck that when we talk about not being happy, we often refer to a reason “I wasn’t happy about X”, but when we talk about actually being happy, we’re less likely to say that we’re happy because of something – rather we’d say that we’re happy with a certain result: “I worked really hard to get this right, and I’m really happy with it”. So if we set an objective and achieve it, that’s where the happiness part comes in – but we don’t talk about setting out with happiness as the objective in the first place.
The reason that this daydream made it all the way to wordpress, was because of the parallels with John Kay’s very interesting “Obliquity” which I read recently. He proposes that, like happiness, profit isn’t an objective you can seek directly, but rather one which happens as a by-product of seeking another objective – one centred around creating value for customers – and doing that really well. There are indeed some great examples in that book of companies whose corporate objectives are re-aligned from one style to another and who can see a clear result in their fortunes directly following such a move. This actually makes a lot of sense when you think about it – companies who focus on extracting profit might have the best sales people, the best lawyers, and the best accountants, but that doesn’t actually generate value for those companies’ customers. On the other hand companies who set out to do important work, and who achieve it-especially if it’s difficult, are actually generating genuine value, capturing that into profit is then much more straightforward than trying to generate profit where there’s no intrinsic value.
So the takeaway from this for a small business? It feels good to know that whilst lawyers and accountants have their place, a business shouldn’t be driven by them, but instead by achieving important work that generates value for others.
Great feature last week on BBC Radio 4’s Money Box Live about small businesses in general and with a discussion around “getting paid” in particular. I was left wondering why some large businesses insist on very long credit terms from small businesses whereas others acknowledge the reality of working in a small business.
Leaving aside the dubious legality of deliberately paying late in breach of terms (and this from companies that use “fair trade” logos as a part of their business), I wonder if this tells us something about the companies in question. If Fujitsu can deliver its margins and maintain its balance sheet whilst paying everyone on time, why should other companies which won’t (or can’t) claim the same numbers. It’s a fair assumption that given free credit, many businesses would be performing better than they currently are, so businesses that pay late are telling us not only that they’re prepared to break their obligations to others, but also their own success is partly dependent on this bad practice.
For the full programme: http://www.bbc.co.uk/programmes/b047zrks