First, I'm confused as to the degree of benefit of the efficient 'cash conversion cycle'. I don't see how any sort of 'float' dynamic can help a company in terms of its cash situation unless the company is experiencing ongoing rapid sequential sales growth.The ongoing benefits of a negative cash conversion cycle are very much tied to continuing revenue growth, but there's no particular need for that growth to be rapid. If a business can generate cash from working capital management - get paid before paying - it will reap value so long as it is increasing the amount of working capital activity (i.e. increasing revenue). While the impact of the benefit will correlate to the velocity of the revenue growth, there's no per se hypergrowth requirement to reap the rewards of continuing float.The impression I get about the whole 'cash flow positive for the remainder of 2000' thing is that it will be accomplished by selling a boatload of stuff in the fourth quarter and carrying a large portion of the cost of those goods over into 2001 as accounts payable. Isn't this little more than a smokescreen? ("Don't pay any attention to the man behind the curtain talking about operating losses - we were cash flow positive this quarter!")No. The cash flow generation would only be a mirage if the annual cash convresion cycle was actually positive, but showed a hiccup of inflow on the Q4 statements thank to holiday payment dynamics. When you annualize the operating cycle or, in the cases of quarterly results, use average payables or inventory for the period rather than quarter end, you can determine the ongoing float generated through working capital. Amazon has run a distinctly negative cycle for its entire existence, and does not simply borrow cash in Q4 and pay it all back in Q1. Example: What if I were to decide that I'm not living as well as I'd like. So, I decide to start spending several hundred a month more than I'm making. I use credit cards, so the bills come later. Sure, I'm living 'cash flow positive', but that doesn't change the fact that I'm living above my means. I'd better hope I'm getting a BIG raise next year, or else I'm gonna have to bite a big bullet to pay the piper.There are two differences between your carpe diem philsophy and Amazon's working capital cycle. First, Amazon doesn't pay interest on its accounts payable and you do pay interest on your credit. But that isn't what you meant, so I'll assume that you're getting short term, interest free credit from the Motley Fool as consideration for your contributions to the boards. Interest or no interest, you're saying, you've still got to pay it back. And you're gonna need a raise to do that, which doesn't look likely considering the amount of time you spend posting on the Motley Fool. Well, let's say 45 days pass and you get an e-mail from TMFOtter asking politely for repayment. You're a little distraught, because you already spent 40% of that money with mmmmmBeer in Tijuana. But then, TMFBuster sends an e-mail offering you another loan, again without interest, but this time for 5% more money. That's timely, allows you pay off your obligation with no cash outflow, and adds another 45 days of interest free capital. This time, you might even wise up and give the money to soldat4800's broker to put in a nice set of REITS and start collecting your grift. It's not the raise you're relying on, but the continuing no-interest loans from the TMF. Without those continued loans, the value of the loan is easy to value, it's simply E*(K^(D/365), where E=borrowings, K=discount rate and D=days borrowed. But each time you get a new loan, you get new value. Now, if your new loans (revenues) are not at least equal to your previous loans and your borrowing period (CCC) hasn't improved, you will be getting new value while still suffering from a cash outflow. You continue to economically benefit from the free loans, but you are still suffering cash outflow.Amazon is unlikely to experience year over year revenue decreases in the near future. Assuming it stabilizes its CCC (which is very much open to question - Q2 numbers will be very significant in this regard), it will thus experience net inflow from working capital. How much inflow depends on the amount of revenue growth and the CCC.Look back at Amazon's cash inflow from working capital (focusing only on inventory, receivables (the lack thereof, and payables, and ignoring prepaid expenses and other accruals). Numbers in millions. 1997 1998 1999Inflow $21.7 $58.1 $158.1 % Growth - 168% 172% Revenue $147.8 $609.8 $1654% Growth - 313% 171%Inflow/rev 14.6% 9.5% 9.6% If Amazon grows revenues at approximate 80% this year and maintains the working capital inflow at ~9% of annual revenue, inflow from working capital could approximate $270 million. That number excludes other accruals, which amounted to an inflow of another $40 million or so last year depending on what you include and $15 in 1998. Bottom line: Unless the company can start scaling and reach the edges of the (rather generous) cost and margin ranges I've shown above, then do even better, I can't see how any manner of 'float' or 'conversion cycle' or any other cashflow dynamic is going to help them. Am I missing something?Sure. If Amazon keeps taking its free loans and shredding them, it will eventually run out of money as the rate of revenue growth produces insufficient working capital generation to overcome the cash outflow from operations. But it seems highly unlikely to happen over the next three quarters or so (and certainly not in a "best case scenario," being that Amazon started this quarter with $1 billion in the bank, is expected to spend under $150 in cap ex and could bring in anywhere from $240-$300 million in working capital inflow during that time (including 4 quarters worth). Just because Amazon should float through Lehman's warning smoothly doesn't mean it's future is secure. Still, I wouldn't blow off the potential benefits generating a continuing float from operations in both the short and long term.
1997 1998 1999Inflow $21.7 $58.1 $158.1 % Growth - 168% 172% Revenue $147.8 $609.8 $1654% Growth - 313% 171%Inflow/rev 14.6% 9.5% 9.6%
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