Watching over Amazon’s cash flow machine
At the centre of the world’s most valuable retailer is a machine for fulfilling customer needs. And keeping a close eye on the machine is Amazon’s Treasurer Kurt Zumwalt. Nicholas Dunbar reports.
When it comes to corporate growth, few treasurers have had the perspective that Kurt Zumwalt has. “Amazon has grown rapidly, typically in excess of 20% per annum, ever since I’ve been there, and I joined in 2004”, he told delegates at the EuroFinance International Treasury Management conference in Geneva.
“When I joined, annual revenue globally was approximately $8 billion and last year it was $177 billion. But the change I’ve seen is not just the revenue growth, it’s also the increased global scope and expansion in complexity”.
Indeed, Amazon is much more than the online retail business that Jeff Bezos founded in 1994 – it’s now a major marketplace for small and medium sized businesses. More than half of the products sold on the platform last year came from third party sellers, rather than Amazon’s own inventory. Add to that the growth of its cloud business – Amazon Web Services – which includes some of the world’s biggest institutions as customers.
A miracle of negative working capital
Yet for all this growth and increasing complexity, the financing machine at the heart of Amazon is remarkably stable. With operating cash flow running at about 10% of revenues, the company can afford to plough most of that back into investing in innovation.
From a treasury perspective, this cash flow machine performs the analogue of levitation because it runs on negative working capital. This miracle is summed up by a number called the cash conversion cycle which states that on average, Amazon gets paid by customers a month before it pays suppliers. For competitors like WalMart or Home Depot, it’s the suppliers that get paid first.
Amazon’s negative CCC parameter is remarkably stable over time, even as the company shifts towards a marketplace model where third-party sellers get paid to a 14-day cycle with discounts for faster payment.
This stability may be a result of the close attention that Zumwalt pays to CCC. “We’re very attuned to what would happen if growth slowed on the revenue side and the impact that a slowdown in the negative cycle would have”, he says. “Global and regional impacts are one of the considerations – a very large one – for managing our liquidity profile. We model it and understand it, and put in place detailed contingency plans.”
Preparing for M&A with five layers of liquidity
The pressure on Zumwalt is even greater, because Amazon views liquidity not only as a risk reserve but also as a growth resource. The company may be awash with operating cash flow but this is not only absorbed by continual self-investment – they are choosing to make increasingly chunky external acquisitions. While the biggest of them – the $13.7 billion purchase of Whole Foods Market – was paid for by issuing new debt, for most M&A it falls to Zumwalt to find the money from the company’s existing liquid assets.
This includes the $20 billion of cash on Amazon’s balance sheet, and $10 billion of securities it owns, but can be stretched to include real estate counted among the company’s $49 billion of property and equipment. “We start with operational liquidity but we’ve also got a plan five to seven steps deep that we can go to when we’re doing an acquisition”, Zumwalt explains, “whether it be a revolver, commercial paper or liquidating some of the real estate we have on a little bit longer time horizon.”
In the face of such demanding liquidity requirements, Zumwalt has to work hard to maximise the efficiency of the cash he has available. That means cash pooling by currency and centralisation, he says. “The next stage we’re working on is the international financial centre structure – deposits and loans to various entities from the top header, and being able to optimise and use that liquidity in any currency you want.”
Running an in-house bank means you don’t need to trade FX
In effect, Zumwalt is running an in-house bank which can make or receive payments on behalf of any Amazon entity in any currency it chooses. This has a bonus of simplifying the company’s foreign exchange transactions.
“When you get an idea of the size and scale of how and where we operate, you have a natural netting of currencies, Zumwalt explains. “Instead of having to trade FX you have a natural book, like a financial institution. Being able to optimise the FX conversion cycle as well as liquidity is really important, and we are spending a lot of time now planning to take advantage of this capability”.
All these pressures mean that Amazon’s treasury has to innovate every bit as fast as the rest of the company. “One of our leadership principles is to invent and simplify”, says Zumwalt. “I always tell the team, especially new people, to look critically at what we do today, because it may not support what we do tomorrow”.
Always say yes to innovation but start out small
The company judges innovations according to their reversibility if they fail. “Jeff likes to talk about the concept of one or two-way doors”, notes Zumwalt. “Many decisions are reversible, two-way doors. Those decisions can use a light-weight process.” To keep changes reversible, Amazon starts them out small.
“We make lots of bets, but more importantly we measure the results”, Zumwalt says. “Does the idea work? You innovate from there, you measure again. You continue to audit. Is your original premise still true? Do you like the result?”
For a company with more than half a million employees, treasury innovation can involve things like using machine learning for checking staff expense claims. “Applying ML means you don’t always need to have a manager to approve it”, Zumwalt says. “We use ML to look for patterns and then audit some of the data, using it as a tool to scale more effectively as an organisation. We’re also using machine learning to look at the cash forecasting aspect.”
Such openness to innovation means that Zumwalt is keen to share his insights with his peers. “Take risks”, he advises treasurers at other companies. “Try new things. Always say yes when asked to take on a new opportunity or challenge even if it makes you feel uncomfortable. See things from a different perspective”.
Kurt Zumwalt will be speaking at EuroFinance’s Managing International Growth on 18-19 March 2019 in San Francisco.