How to Unlock Hidden Cash: Amazon’s Success Secret is… Payable?

Ever wonder how Amazon manages to be so cash-rich while constantly investing in new ventures? The secret lies in an unexpected place: their accounts payable. Let’s dive into the fascinating world of Amazon’s cash flow strategy.

The Marketplace Magic

At the heart of Amazon’s cash flow genius is its Marketplace. Picture this: third-party sellers eagerly listing their products on Amazon’s platform, reaching millions of customers. But here’s the kicker – Amazon doesn’t just provide a platform; they’ve turned it into a cash-generating powerhouse.

How? It’s all in the timing:

  1. Customers pay upfront for their purchases.
  2. Amazon holds onto this cash.
  3. After a while, Amazon pays the sellers.

This delay creates a beautiful thing called “float” – money Amazon can use freely, because when Amazon pays out the payable, new transactions occur, replenishing the pool, so Amazon can keep the pool forever. As sales grow, so does this pool of available cash. It’s like having an interest-free loan that gets bigger as your business expands!

The Negative Cash Conversion Cycle

Now, let’s talk about a financial unicorn: the negative Cash Conversion Cycle (CCC). Typically, companies buy inventory, wait to sell it, then wait again to collect payment. This period from buying to collecting is called CCC. Amazon flips this on its head:

  1. They collect payment first.
  2. Then, they pay their suppliers much later.

This negative CCC means Amazon is using other people’s money to fund its operations and growth. Brilliant, right?

(If you want to know more about CCC, please read my article)

The Gift Card Goldmine

But wait, there’s more! Enter the humble gift card. When you buy an Amazon gift card, you’re essentially giving Amazon an interest-free loan. In 2023, unredeemed gift cards totaled a staggering $5.3 billion. This isn’t just a one-time boost – it’s a perpetual float that grows with sales, providing Amazon with a constant source of interest-free capital. Exactly like the payable from its Marketplace.

Building Trust in Turbulent Times

After the dot-com bubble burst, many companies struggled to maintain credit. Amazon’s solution? Stockpile cash. Even when operating at a loss, they maintained positive cash flow. This cash cushion reassured suppliers, allowing Amazon to keep its favorable payment terms.

Having longer payment terms is the way to cash rich. If you want to negotiate longer payment terms, focus on building strong cash flow, maintaining low debt (although Amazon had huge debt after the bubble burst, low debt is preferable), and keeping a healthy cash balance that can pay every operating cost. This financial strength can help you secure more favorable conditions from suppliers.

The Inventory Innovation

Amazon didn’t stop there. They revolutionized inventory management to minimize it:

  1. Initially, they purchased products after receiving orders, then shipped them.
  2. Then, Amazon centralized their operations into a single warehouse, unlike traditional retail bookstores which have multiple stores, each needing to maintain their own stock of books.
  3. Finally, they shifted focus to the no-inventory Marketplace model, letting third parties have inventory.

The Virtuous Cycle

All of this cash doesn’t just sit idle. Amazon reinvests it, creating a powerful cycle:

  1. Invest in R&D to improve the customer experience.
  2. Happy customers buy more.
  3. More sales mean more cash from the negative CCC.
  4. Reinvest that cash into further improvements.
  5. Repeat!

This cycle not only fuels Amazon’s growth but also makes their platform irresistible to third-party sellers.

References

・CO-EVOLUTION BETWEEN CCC-DRIVEN CASH FLOW MANAGEMENT AND TRANSFORMATION OF R&D – AMAZON’S ENDEAVOR by Yuji Tou, Chihiro Watanabe and Pekka Neittaanmäki

・The Everything Store: Jeff Bezos and the Age of Amazon – by Brad Stone

・Gift Cards and Mental Accounting: Green-lighting Hedonic Spending- vy CHELSEA HELION and THOMAS GILOVICH