To Investors,
I recently came across an article discussing how Amazon has a negative cash conversion cycle.
Here’s a comparison table of Amazon’s cash conversion cycle vs an industry benchmark and industry peers Costco and Walmart.
Remember that a company’s cash conversion cycle (CCC) is the time it takes to turn inventory into cash, then pay suppliers — with the cash conversion cycle formula as a follows:
CCC = Inventory Days + Accounts Receivable Days – Accounts Payable Days
Quick note:
Inventory days: the number of days that the inventory is stored before a sale is made.
Accounts receivable days: the number of days the company takes to collect cash from credit sales.
Accounts payable days: the number of days the company takes to pay suppliers.
For Amazon, Inventory Days + Accounts Receivable Days < Accounts Payable Days.
The reason that Amazon’s CCC is negative is because the company is essentially a cash machine — consistently collecting cash from customers weeks before they have to pay their suppliers, and the driver for this is the company’s scale of execution across two business models that Amazon runs simultaneously, the Pay-On-Scan model and the Standard First Party model.
The Pay-on-Scan (POS) Model
While the standard model involves buying inventory, Amazon also utilises Pay-on-Scan (or consignment) arrangements for certain suppliers. This is the holy grail of retail cash flow because it effectively removes the inventory hurdle from the cash conversion equation.
The Timeline of a POS Transaction:
Day 0: A supplier sends a product to an Amazon warehouse. Crucially, Amazon does not pay for it yet and does not technically own it.
Day 60: A customer buys the item. Only at this exact moment — the “scan” at checkout — does Amazon technically “buy” the item from the supplier.
Day 61: Amazon receives the cash from the customer.
Day 90: Based on a “Net 30” agreement triggered by the sale, Amazon finally pays the supplier.
In this scenario, Amazon held the product for 60 days without spending a cent of its own capital. They then collected the customer’s money and held that cash for an additional 30 days before paying the supplier.
By the time the bill comes due, Amazon has already had the profit — and the supplier’s cost price — sitting in its bank account for a month. This “velocity gap” allows them to fund operations and expansions using money that technically belongs to their vendors.
The Standard 1P (First-Party) Model
While the Pay-on-Scan model is essentially a risk-free shelf-space agreement , the Standard 1P Model is where Amazon acts as a traditional retailer, with a twist. For items labeled “Ships from and sold by Amazon,” the company actually buys the inventory upfront.
However, because of their massive scale, they dictate terms that turn this traditional liability into a massive cash advantage.
How it differs from Pay-on-Scan:
Ownership: Unlike POS, Amazon takes legal ownership of the goods the moment they arrive at the warehouse.
The Net 60/Net 90 Power Play: Amazon negotiates payment terms like Net 60 or Net 90. This means they don’t have to pay the supplier for 2 or 3 months after receiving the goods.
Efficiency as a Weapon: Amazon is famously fast at moving goods, often selling an item within 30 to 40 days.
The Timeline Comparison:
In a POS Model: Amazon doesn’t pay until after the sale happens.
In the 1P Model: Amazon eventually pays for the inventory regardless of a sale, but they move the product so fast that the customer’s cash arrives weeks before the supplier’s invoice is due.
In both models, the velocity gap creates a window where Amazon holds billions in cash that technically belongs to suppliers. During this period, they can use that “interest-free loan” to build new warehouses, invest in AWS, incubate new products like Kindle and Prime, or acquire companies. There’s a case to be made that Amazon used this advantage as a growth mechanism in the past.
Let me show you what I mean…
“Shares Issued” by Amazon (not market cap) grew by only 1.2x between 2005 and 2015, and then by 22.5x from 2016 – 2025. This could suggest that Amazon raised capital from outside investors between 2016 and 2025, but did not use this equity capital policy strategy before 2015.
Long-term debt for Amazon grew by 5.4x from 2005 to 2015, and by 8.5x between 2016 and 2025. Again, raising outside capital seems to be a strategy used only after 2015. See the following chart illustrating debt growth below for Amazon.
I’ve broken down the chart into “Lean Years” (characterised by low debt and low new equity), “Growth Years” (characterised by increasing debt issuance), and “Logistics & Covid Expansion” (characterised by even higher debt and high equity issuance).
To close out my example of how Amazon used their cash conversion cycle advantage as an “interest free loan”, see an old qualitative analysis note I wrote referencing an investor pitch deck from Social Capital, about how Amazon allocated capital to turn almost every expense line item into a business line item by creating a product to address each expense line. You can read about that here.
In 2005 the products listed in the pitch deck cutout above were non-existent. By 2015 they were business lines — Fulfillment, AWS, Prime, Kindle, etc. How was Amazon able to build out all of the products you see pictured above without raising debt or conducting equity raises? Seems like the cash conversion theory may hold.
So the next time your business is struggling with cash flow issues, perhaps a similar cash conversion cycle strategy could get you the solutions you need.
On my journey to becoming a master capital allocator, one lesson down, a billion more to go.
I hope you all have a great start to your week!
-Wandile Sithole
