Reference no: EM133258245

Question:

According to the below text, Amazon has a negative cash conversion cycle. Consider about the meaning of this, and assume Amazon's Cash Conversion Cycle is "-20 days".

Try to estimate what this was worth to Amazon in FY 2021 using company-level data (don't need to worry about breaking out separate business units)

There is no "right" or "exact" answer,

(Don't have to calculating the Cash Conversion Cycle, but have to assume it is -20 and then estimate what this is worth on an annual basis)

Text

Amazon's Cash Conversion Cycle-Realizing Financial Benefits from Tech-Enabled Speed

Quickly moving products out of warehouses is good for customers, but Amazon's speed also offers another critical advantage over most brick-and-mortar retailers: The firm is astonishingly efficient at managing cash. Here's how.

When incoming inventory shows up at most retailers-and this is certainly true for Amazon, Barnes & Noble, and Best Buy-those firms don't pay their suppliers right away. Instead, they log payment due for these goods as an account payableMoney owed for products and services purchased on credit., a bill that says when payment is due some time in the future. Accounts payable periods vary, but it's not uncommon for a big retailer to be able to hold products for a month or longer without having to pay for them. However, when customers buy from a retailer, they pay right away. Cash is collected immediately, and funds from credit cards and checks clear in no more than a few days. The firm's period between shelling out cash and collecting funds associated with a given operation is referred to as the cash conversion cyclePeriod between distributing cash and collecting funds associated with a given operation (e.g., sales). (CCC). There are other factors that influence the CCC, but right now we'll concentrate on the hugely important time difference between paying for inventory and selling those goods. A retailer wants this number to be as small as possible; otherwise, unsold inventory is sitting on shelves and doesn't generate any cash until it's sold. Especially cash-crunched firms may even require short-term loans to pay suppliers, and those firms that can't generate cash quickly enough are referred to as having liquidity problemsProblems that arise when organizations cannot easily convert assets to cash. Cash is considered the most liquid asset-that is, the most widely accepted with a value understood by all..

While a firm's CCC varies from quarter to quarter, Barnes & Noble has reported that its inventory has sat on shelves sixty-eight days on average before being purchased. Best Buy has held inventory for as many as seventy days before a sale. Costco and Walmart sell goods more quickly, but they also pay for inventory before it is sold. When compared with these peers, however, Amazon alone consistently reports a negative CCC-it actually sells goods and collects money from customers weeks before it has to pay its suppliers. This gives the firm a special advantage since it has an additional pool of cash that it can put to work on things like expanding operations, making interest-bearing investments, and more.

The efficiency of a firm's cash cycle will vary over time. And numbers reported are an average for all products-some products are slow movers while others are sold very quickly. But the negative cash conversion cycle is another powerful benefit that Amazon's fast-fulfillment model offers over rivals. The goal for Amazon? Keep inventory turnsThe number of times inventory is sold or used during a specific period (such as a year or quarter). A higher figure means a firm is selling products quickly. high (i.e., sell quickly) and pay suppliers later.

Comparing against rivals in a pandemic year is a less-fair comparison, so the chart above hasn't been updated, but note that as Amazon's machine learning models get even better at choosing the right time to reorder product to minimize time in inventory without leading to stockouts, Amazon's CCC improves. When Amazon shifted to so-called deep learningA type of machine learning that uses multiple layers of interconnections among data to identify patterns and improve predicted results. Deep learning most often uses a set of techniques known as neural networks and is popularly applied in tasks like speech recognition, image recognition, and computer vision. machine learning models-more complex models that are often described as having more "hidden layers" that can be uncovered with more powerful computing-the company saw a fifteen-fold improvement in the accuracy of its forecasts. The firm's CCC for Q4 2020 was almost negative twenty-five days-meaning most customers paid Amazon for products nearly a month before the firm had to pay suppliers. And that was during a quarter where many retailers experience a cash crunch due to the need to hire more holiday quarter staff, or spend more to stock up for holiday season inventory. For contrast, Macy's CCC was a positive seventy-one days-meaning on average that firm paid for goods which sat on shelves about two and a half months before it collected cash from customer purchase.