The Amazon Effect: Cash Will Give You Freedom
Updated: May 17, 2019
Each year, Jeff Bezos, the mastermind and business innovator behind Amazon shares a letter with his shareholders. These letters, dating back to 1997, serve as a goldmine of independent and innovative thinking for today’s business leaders. Our series, The Amazon Effect, focuses around these letters – and today we’re discussing the importance of free cash flow.
From the very beginning, Bezos has operated Amazon from a perspective quite different from most other businesses. He puts the customer first, working backward from their needs to create new products and ideas, and he is willing to take short term losses if it means that he will gain in the long term.
It’s that attitude that allowed him to completely reshape the retail industry.
Most of the advice found in his letters seem commonsense, but are difficult to enact in a fast paced business environment that seems to favor quick returns over long term stability. Bezos has always rejected that concept, preferring to play the long game and cater to the needs of his customer - even needs they didn’t know they had at the time (case in point, the Kindle, a device that replaced the need for books).
But being a business that’s entirely customer and future focused, you’ll need to be able to withstand early losses and be able to forego quick fixes and gains. Amazon sold at a few bucks a share for many years, and before that, operated regularly at a loss. What’s the key ingredient in being able to operate this way? Cash.
In Bezo’s 2004 letter, he wrote about how having free cash flow, and leaning on that more so than capital investments and gains allowed him to operate and innovate quicker.
When you put on TV, you would think the growth or success of a business is entirely tied to their stock prices, their earning-per-share and other metrics that are largely based on projections. Many companies - successful companies - are happy to function with this mindset.
Bezos, to this day, as a large publicly traded company, cares far more about free cash flow than he does about all of those other metrics.
A company of his size would be able to operate and thrive for a long time without having any cash on hand. But Bezos rejects that method. He turns over his inventory quickly so that he can pay suppliers well before payments are due. He has structured the business to prioritize cash flow.
For a small business that isn’t public, the alluring equivalent would be to operate your business on loans and credit. You’re going to run into situations as you grow where you’ll have no choice but to operate using those methods. But do your best to structure your business to prioritize free cash flow. Cash is immediate.
With positive cash flow, you can innovate, invest, and grow quickly.
In our series, “The Amazon Effect” we’ll delve further into Bezos’ yearly letters to shareholders and how they can help you and your small business. Keep checking back for more.