Focus on free cash flow to enable more innovation

Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share.
Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings.”

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:

  1. The company turns over inventory quickly
  2. It collects payments from customers before payments to suppliers are due
  3. 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. Looking forward from 2004 to 2018 you can see how free cash flow has accelerated with sales and ahead of profit, allowing amazon to invest in innovation.

Jeff Bezos letter to shareholders  

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.

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

create more than you consume

Bezos last letter to shareholders with a simple message: To all of you: be kind, be original, create more than you consume, and never, never, never let the universe smooth you into your surroundings. It remains Day 1.

Bezos last letter to shareholders 2020

Takeaway

If you want to be successful in business (in life, actually), you have to create more value than you consume. Your goal should be to create value for everyone you interact with. With all your stakeholders. Customers, colleagues, shareholders, your community, the environment. Any business that doesn’t create value for those it touches, even if it appears successful on the surface, isn’t long for this world. It’s on the way out.

To create value you have to be different… and it’s hard to stay different as everyone wants you to conform.

Challenge

All living things have a tendancy to merge to the same as their surroundings and spend their whole life being warmer or cooler than their surroundings. Companies are the same: the world is continually pulling at you to be more normal and less distinctive. How much work does it take to maintain your distinctiveness? To keep alive the thing or things that make you special?

Solution

We all know that distinctiveness – originality – is valuable. You have to pay a price for your distinctiveness, and it’s worth it. Being yourself is worth it, but don’t expect it to be easy or free. You’ll have to put energy into it continuously.

The world will always try to make Amazon more typical – to bring us into equilibrium with our environment. It will take continuous effort, but amazon can and must be better than that and remain distinctive adding value to all it’s stakeholders.

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.

“To all of you: be kind, be original, create more than you consume, and never, never, never let the universe smooth you into your surroundings. It remains Day 1.”

link to all letters to shareholders 1997-2020

  • 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

2020: Create more value than you consume

Jeff Bezos letter to shareholders 2020

prioritise cash flow

“The year 2001 will be an important one in our development. Like 2000, this year will be a year of focus and execution. As a first step, we’ve set the goal of achieving a pro forma operating profit in the fourth quarter. While we have a tremendous amount of work to do and there can be no guarantees, we have a plan to get there, it’s our top priority, and every person in this company is committed to helping with that goal. I look forward to reporting to you our progress in the coming year.”

Takeaway

Focusing on free cash flow or otherwise giving your business some form of cash moat (whether through outside equity, debt stakes, or tight operations) will help ride out difficult times when customers aren’t buying and/or financing has dried up.

If you’re able to maintain composure while others fall, you have the opportunity to come out ahead and capture a much bigger market share.

Challenge

The dot-com bubble took down a slew of internet companies, including Pets.com and fashion site Boo.com. Amazon, too, nearly went bankrupt. The same happened in financial crisis of 2008/9 and in COVID pandemic 2020.

While the majority of tech upstarts folded during the crash, Amazon stayed afloat. Since March 2000, the company has grown about 20x in market value.

Solution

One reason that Amazon was able to ride out the downturn was the tight cash conversion cycle.

While some companies left inventory in stock for long periods of time, Amazon was always focused on minimizing this to a few days at most, and collecting payments from customers before paying suppliers. This avoided lag times and ensured that Amazon continued to have cash coming in while others were bleeding dry.

Prioritizing free cash flow and being extremely disciplined with their operating cash flows gave Amazon a sound foundation they could use to ride out tough times and ultimately come out ahead.

Jeff Bezos letter to shareholders  

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.

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

Bet on ideas with unlimited upside

Jeff Bezos letter to shareholders 2014

KEY MESSAGE 17/22

“A dreamy business product has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time—with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.”

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.

Takeaway

Be aggressive about placing bets on dreamy business ideas. You’ll have failures, but sufficiently big winners will more than make up for all of your failed experiments.

Challenge

Many relationships, particularly business ones, require bold moves to get going. And to find true success, you have to commit for the long haul. The problem is that these moves don’t just appear risky — often, they’re hard to rationally justify at all.


When your risk tolerance is high, you can make bets all over the map.

Organizations that want to make data-driven decisions often have a difficult time with placing risky bets because those bets often don’t have clear quantitative evidence to support them. If they did, there wouldn’t be a risk of failure, there wouldn’t be experiments, and there wouldn’t be such a big upside.

Solution

Place your bets where your downside is capped but your upside is unlimited.

For Bezos, the best bets are on dreamy businesses. You know you have a “dreamy” business idea when:

  1. Customers love it
  2. It has the potential to become very large
  3. It has the potential of very strong returns
  4. It has the possibility to endure

Each of the three major bets that Bezos mentions in this letter — Marketplace, Amazon Web Services (AWS), and Prime — was a risky idea.

With Prime, for example, no one on the Amazon team could point to numbers showing that giving customers free shipping for a yearly fee would ever pay for itself.

Today, each of these three bets is a pillar of Amazon’s business. In fact, in 2017, all of Amazon’s operating income came from AWS, a once-risky bet on a “dreamy” business idea. With almost $17.5 billion in sales in 2017, and about $4.5 billion in profit, it was Amazon’s second-largest source of revenue.

Not every bet that Amazon has ever placed has succeeded. The company was a significant shareholder in both Pets.com and living.com, for example. They lost their investment, but stood to gain so much more if they turned out right.

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

Decentralise decision making to generate innovation

Jeff Bezos letter to shareholders 2013

KEY MESSAGE 16/22

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.

“We have the good fortune of a large, inventive team and a patient, pioneering, customer-obsessed culture — great innovations, large and small, are happening everyday on behalf of customers, and at all levels throughout the company. This decentralized distribution of invention throughout the company — not limited to the company’s senior leaders — is the only way to get robust, high-throughput innovation.”

Takeaway

Innovation comes from distributed decision-making. Top-down teams are effective at optimizing existing processes and enforcing the completion of work, but only decentralized, bottom-up teams can consistently generate new ideas.

Challenge

In most big companies, command-and-control is the way that work gets done. Ensuring that important decisions only get made by those at the top maintains a certain level of quality and keeps everything stable.

Building a business that is continuously throwing off new ideas and innovating, on the other hand, requires that your people have leeway. You need autonomous teams that can exercise their own judgment rather than having to submit every idea they have to a committee. It requires your company to recalibrate how it hires, how it takes risks, and the opportunity it offers to even junior employees.

Solution

Its culture of creativity is a large part of why Amazon has been so successful on so many fronts, and why it has risen to the second-largest company by market cap in the world.

That creativity is often actually a function of the proactive way Amazon thinks about customers. Rather than wait for their customers to tell them about something they want, Bezos says, Amazon would always rather create the thing they don’t even know they want yet.

To encourage this kind of innovation inside your company, however, you need to have distributed decision-making and autonomy for more than just your senior staff.

At Amazon, employees who have an idea are encouraged to pursue it, even if they have to upset traditional corporate rules to do it.

Great innovations come from a “large, inventive team” with a “patient, pioneering, customer-obsessed culture” rather than from a small braintrust.

If you’re a junior employee at Amazon and you have an idea for some new way to delight customers, Bezos writes, you’re just as encouraged to give it a try as a senior leader. Experiments can start small. The downside of a small failed experiment is low, but the potential upside can be very high.

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