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