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.”
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.
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.
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
- 1998: Stay terrified of your customers
- 1999: Build on top of infrastructure that’s improving on its own
- 2000: In lean times, build a cash moat
- 2001: Measure your company by your free cash flow
- 2002: Build your business on your fixed costs
- 2003: Long-term thinking is rooted in ownership
- 2004: Free cash flow enables more innovation
- 2005: Don’t get fixated on short-term numbers
- 2006: Nurture your seedlings to build big lines of business
- 2007: Missionaries build better products
- 2008: Work backwards from customer needs to know what to build next
- 2009: Focus on inputs — the outputs will take care of themselves
- 2010: R&D should pervade every department
- 2011: Self-service platforms unlock innovation
- 2012: Surprise and delight your customers to build long-term trust
- 2013: Decentralize decision-making to generate innovation
- 2014: Bet on ideas that have unlimited upside
- 2015: Don’t deliberate over easily reversible decisions
- 2016: Move fast and focus on outcomes
- 2017: Build high standards into company culture
- 2018: Wandering is an essential counterbalance to efficiency