Bezos measures amazon by free cash flow

Measure your company by your free cash flow

Jeff Bezos letter to shareholders 2001 

Key message 5/22

Jeff Bezos has been writing a letter to shareholders since 1997 and looking at all if them gives an insight to the organisation and a masterclass in leadership. This is a series of short blogs  that gives you a snap shot / key takes outs of each letter, along with links to them all.

2001 : “Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows, more than any other single variable, seem to do the best job of explaining a company’s stock price over the long term.”

Takeaway

Because “a share of stock represents a share of that company’s future cash flows,” free cash flow is the best possible metric for understanding financial success as a business.

Free cash flow should be prioritized because it is pegged to your company’s value both today and in the future.

Challenge

It can be hard to prioritize free cash flow when public sentiment (especially stock prices) usually moves in line with revenues and profits. Few CEOs are able to hold their ground against the pressure of quarterly earnings results.

Communication is a critical (and often undervalued) way to highlight progress. While press releases and MD&A sections in SEC filings add some color to numeric results, they don’t usually allow much space for subtleties outside of their templates.

Solution

In Bezos’s original 1997 letter (discussed below), he made it clear to his new investors exactly how Amazon thought about free cash flow vs. GAAP accounting.

With each subsequent letter, he has enclosed a copy of that original letter to remind shareholders of Amazon’s outlook on this question.

For Bezos, focusing on free cash flow provides a clear method of valuing Amazon for internal planning purposes, as well as for investors.

The metric represents how much value each individual share of stock in a company has today and stands to have in the future.

“Ultimately, your determination of cash flow per share will be a strong indicator of the price you might be willing to pay for a share of ownership in any company,” he writes.

Over the years, Bezos’s constant advocacy for the idea of focusing on free cash flows has turned the idea into a more common and accepted view.

link to all letters to shareholders

  • 1997: Bring on shareholders who align with your values

Jeff Bezos Letter to Shareholders 1997

  • 1998: Stay terrified of your customers

Jeff Bezos Letter to Shareholders 1998

  • 1999: Build on top of infrastructure that’s improving on its own

Jeff Bezos Letter to Shareholders 1999

  • 2000: In lean times, build a cash moat

Jeff Bezos Letter to Shareholders 2000

  • 2001: Measure your company by your free cash flow

Jeff Bezos Letter to Shareholders 2001

  • 2002: Build your business on your fixed costs

Jeff Bezos Letter to Shareholders 2002

  • 2003: Long-term thinking is rooted in ownership

Jeff Bezos Letter to Shareholders 2003

  • 2004: Free cash flow enables more innovation

Jeff Bezos Letter to Shareholders 2004

  • 2005: Don’t get fixated on short-term numbers

Jeff Bezos Letter to Shareholders 2005

  • 2006: Nurture your seedlings to build big lines of business

Jeff Bezos Letter to Shareholders 2006

  • 2007: Missionaries build better products

Jeff Bezos Letter to Shareholders 2007

  • 2008: Work backwards from customer needs to know what to build next

Jeff Bezos Letter to Shareholders 2008

  • 2009: Focus on inputs — the outputs will take care of themselves

Jeff Bezos Letter to Shareholders 2009

  • 2010: R&D should pervade every department

Jeff Bezos Letter to Shareholders 2010

  • 2011: Self-service platforms unlock innovation

Jeff Bezos Letter to Shareholders 2011

  • 2012: Surprise and delight your customers to build long-term trust

Jeff Bezos Letter to Shareholders 2012

  • 2013: Decentralize decision-making to generate innovation

Jeff Bezos Letter to Shareholders 2013

  • 2014: Bet on ideas that have unlimited upside

Jeff Bezos Letter to Shareholders 2014

  • 2015: Don’t deliberate over easily reversible decisions

Jeff Bezos Letter to Shareholders 2015

  • 2016: Move fast and focus on outcomes

Jeff Bezos Letter to Shareholders 2016

  • 2017: Build high standards into company culture

Jeff Bezos Letter to Shareholders 2017

  • 2018: Wandering is an essential counterbalance to efficiency

Jeff Bezos Letter to Shareholders 2018

Author: Andrew Mann

Managing Partner at NorthBailey. Having had senior marketing & insight roles at Tesco, Sainsbury's, Asda, Coop and M&S, I'm now using my experience & network to solve strategic marketing problems for NorthBailey clients

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s