Free cash flow enables more innovation

free cash flow innovationFree cash flow enables more innovation

Jeff Bezos letter to shareholders 2004 

Key message 8/22

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.

“Though some may find it counter-intuitive, a company can actually impair shareholder value in certain circumstances by growing earnings. This happens when the capital investments required for growth exceed the present value of the cash flow derived from those investments.”

Takeaway

Prioritizing free cash flow will allow you to experiment and innovate quickly, as capital won’t be tied up in investments that could be irrelevant by the time they’re paid off. In today’s fast-moving business environment, this is essential to keep from falling behind.

Challenge

Many public companies prioritize metrics like earnings per share or earnings growth when benchmarking their performance. Media coverage, analyst reports, and public opinion all play a role in developing this focus, but it can be ultimately counterproductive for a large enterprise to concentrate on increasing its earnings, even when its primary obligation is to its shareholders.

As Bezos reminds us, “Earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows.”

Solution

The solution to building a financially durable and growth-ready company is to focus less on earnings, and more on free cash flow.

If you build a business with earnings growth but no free cash flow, it’s often a poor investment over the long term.

Structuring your business to prioritize free cash flow will look different from industry to industry, but Amazon does it in a few key ways:

  • The company turns over inventory quickly
  • It collects payments from customers before payments to suppliers are due
  • It minimizes its investment in its own inventory

Amazon maintains a cash generative operating cycle and can keep its investments in fixed assets low, at only 4% of all sales in 2004.

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