The lag between when Amazon gets paid by customers and when it has to pay its suppliers hit an all-time high of 35 days in the third quarter. Amazon doesn’t need to borrow, nor it needs to issue stock. It uses its cash-generating operating cycle to fund its future investments.
A key metric of a company’s cash-generating prowess is the cash conversion cycle, which is the amount of time needed to sell inventory plus the amount of time it takes customers to pay minus the length of time it takes the company to pay its suppliers. The lower the metric, the better. If it is below zero, it means the company gets paid by customers before it pays its suppliers.
Walmart, Target, and Costco - retailers built on their efficient ability to move inventory - can bring their cash conversion cycle to the low single digits. “At department store chain Macy’s, it’s 71 days. At the legendarily efficient Wal-Mart, 12 days. At Costco, with its limited inventory and super-fast turnover, it’s just four days,” wrote Justin Fox at Bloomberg.
Amazon’s cash conversion cycle was negative 35 in the third quarter. The lowest in nearly two decades. That means that while the best-performing retailers are happy to sell products having purchased them less than ten days ago, Amazon sells products and only pays its suppliers more than a month later.
The company has other lines of business beyond retail, like the marketplace, Prime, and AWS, to name a few. Each has different payment terms, and inventory turns. All combined, nevertheless, contribute to the final - negative - cash conversion cycle. Other tech giants, Facebook and Google, have positive cash conversion cycles, and only Apple has a lower negative cash conversion cycle than Amazon.
The key to Amazon achieving a negative cash conversion cycle is its ever-increasing terms with suppliers. On average, it took the company 93 days to pay its invoices in the third quarter. Most retailers take 30-40 days to settle their invoices. Amazon points this out in the quarterly earnings report: “We generally have payment terms with our retail vendors that extend beyond the amount of time necessary to collect proceeds from our consumer customers.”
“In the past, extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy, analysts say,” wrote Stephanie Strom at The New York Times.
Having a negative cash conversion cycle allows Amazon to borrow from its suppliers to finance its operations, interest-free.