Learn This Jeff Bezos Cash Flow Lesson
Jeff Bezos’ Amazon almost never reports a profit, yet the company is on solid financial ground, still popular with investors, and considered the leader in e-commerce and a variety of other tech sectors.
Further, Bezos brushes aside any questions or criticism of Amazon’s lack of profitability by touting the company’s incredible cash flow. And this is where there’s a lesson for every small business owner.
Mint green with envy
Amazon’s ability to generate cash makes the US Mint jealous. How is your small business doing in this regard? If it seems to you like you’re doing well, but you’re having problems making payroll or keeping up with your accounts payable, you need to take a serious look at your cash flow. It’s is an area where even good businesses can improve.
Let me give you a metric that will help you gauge where you’re at today. It will also help you target the areas where you need to improve.
The ability of your small business to generate cash is captured in something called the cash conversion cycle (CCC). The formula for the CCC is three basic steps:
- Start with the number of days of inventory that you have on hand,
- Add how long it takes customers to pay you,
- Subtract how many days it takes you to pay your suppliers.
When this number is low, it means that you have a good cash flow. You won’t believe what Amazon’s CCC number was recently. (I’ll share that in just a few moments). If you consider that formula, you’ll see that it’s a bad thing to have a lot of cash tied up in inventory and accounts receivable and that it’s a good thing to delay paying your bills for as long as possible – not rocket science, but important to know and control. Here’s an online calculator you can use.
How low can you go?
Writing on this topic for the Harvard Business Review, Justin Fox said that efficient retailers like WalMart and Costco have CCCs in the single digits. However, that’s nothing compared to Amazon, which had a CCC of negative 30.6 days back in 2013. Apple is another star, scoring a negative 44.5. In other words, they don’t carry much inventory, get paid with lightning speed – should we call this Apple Pay? – and are able to hold off their creditors rather well.
This is a simple formula to remember and use in your small business. But aside from measuring cold hard cash, it’s more important to consider it as a measurement of how well you are managing your business.
Frankly, sales are not always completely in your control, but every element in the CCC formula is generally in your control. You should be able to control your inventory, how long you’re kept waiting for payment and how long you’re able to stretch out payments to your supplier.
Your goal should be to drive down your CCC as far as possible. Further, always keep your eye on it. It’s easy to let some of these elements slide. If you take your eyes off these metrics, inventory can build up and client payments can slip.
Suddenly, you’re in a cash flow crunch.
