4.3 Application of Working Capital Ratios to Amazon.com

In the previous chapter, we defined the major working capital ratios:

In addition, turnover ratios are often expressed in terms of number of days by dividing 365 by the turnover ratio:

Finally, the Cash Conversion cycle is the sum of the first two, the aggregate number of days for collecting accounts receivable and the number of days required to sell inventory.

Now, recall that it was 1999 when Amazon expanded into its own warehouses.  This was the year where the GBF strategy started to take effect but had a negative impact in the.  This was reflected in Amazon’s inventory management ratios as follows:

COGS increased sharply in 1999 along with Sales.  However, the cost of this was the sharp decline in inventory turnover and increase in days to sell inventory; the days to sell inventory almost tripled to 59.69 from 22.61.  The impact of the old economy managers is evident in 2000 where the days to sell inventory were almost halved and by 2001 were equal to 1998 levels but with a 600% increase in sales. In other words, the GBF strategy was back in balance with at least 1998 ratio levels.

Amazon’s other working capital ratios are as follows:

You can see that Amazon increased the days to paying its payables especially in 1999 when it increased to 125.27 days; this recovered to the 1998 levels by 2000. 

Similarly, on the collection front Amazon’s 1999 numbers increased sharply.  Overall, it can be seen that Amazon’s working capital strategy is to attain favorable creditor terms but collect their payables relatively quickly.

Overall, Amazon’s GBF and expansion in 1999 led to a significant deterioration in their working capital management which was subsequently rectified by their managers.