How is Amazon Funded by Vendors?
The e-commerce platforms like Amazon are making cash by getting goods from vendors and selling these to customers. In terms of accounting, there is a term called ‘Cash Conversion Cycle’, which is a metric that is used to see how efficient a company is at purchasing inventory, selling the goods to the consumers, collecting payments, and settling the payments to suppliers. This metric would calculate the lag between two time factors:
- When the company has to pay its suppliers
- When the company gets paid by their customers
More recently, Amazon’s cash conversion cycle was made public. It showed that the CCC of Amazon fluctuates a lot according to seasons and last year, it was -38. So, what it means? This means that Amazon has paid its suppliers only after 38 days of getting paid by their customers. From this conversion rate, we can understand that the company is able to fund their growth by utilizing their vendors as its line of credit.
It can also be noted that Amazon has a negative conversation rate and this is quite a rare occurrence. We can find few companies doing it better than Amazon and Apple Inc is one of them.
Three Parts of Cash Conversion Cycle:
The cycle consists of three parts as follows:
- Days Inventory Outstanding: Time required to sell inventory
- Days Sales Outstanding: Time required to collect receivables
- Days Payable Outstanding: Time afforded by the company to pay bills
In this, the days payable outstanding is noteworthy as this is a measurement that smaller retailers could measure easily. This metric informs us how long it would take a company to pay its bills. During last year, Amazon took an average of 104 days to pay its bills. This is more than the normal 90-day terms.
Amazon Effectively Funds:
When we compare the above statistics with the other metric where the company took <45 days to turn its inventory into sales, we can clearly understand that the company is effectively using its inventory to fund its growth. Also, while its ability to turn their inventory into sales decreased over time, it has increased the terms with vendors.
When we consider only cash flow, we can see some favorable terms prevailing between Amazon and its vendors. The current situation is that with overspending on inventory, the company will not be able to sell fast enough and Amazon is able to sell the inventory before it has to pay its bills.
It appears that marketplace vendors are getting paid every two weeks, which is much shorter than the vendor cycle. But, Amazon isn’t ready to take risks with their inventory as it’s its sellers’ problem. Thus, the company is getting up to two weeks of time to put the money in other investments.
Basically, any extra day of the difference between the day of inventory sale and the day of payment to the seller is a good opportunity for the company to invest in its growth. Therefore, as long as Amazon continues to expand, its access to this cheap capital will be acting as a key. Several top retailers are agreeing that a negative cash conversion is a golden ticket for retailers. And, we believe that several of the Amazon’s top sellers are following a similar metric. To know how to become a top seller on Amazon, join us at AmzTrainer.com. We already have the materials for you to make you traverse the Amazon journey successfully!