Question

Amazon.com immediately receives cash from its customers when sales occur on its website. When the company stretched the number of days taken to pay its suppliers from 63 to 72 days, this created a huge jump in the company’s accounts payable balance, which helped increase free cash flow from $346 million to $1.36 billion. In one quarter, Amazon’s sales increased 28% but its accounts payable nearly doubled, causing a 116% increase in free cash flow.

Answer the following question:
Did Amazon already have enough free cash flow at the $346 million amount? Do they need to have the full $1.36 billion in free cash flow? What range of free cash flow do you think Amazon should strive to maintain?

Answer 1

Whether Amazon's free cash flow of $346 million is sufficient or if it requires $1.36 billion depends on the company's specific financial needs and growth strategy, which reflects their cost-efficient business model and large-scale operations. Defining an exact range for Amazon to maintain without further context would be speculative. A higher free cash flow can offer more flexibility for the company.

Step-by-step explanation:

The question asks whether Amazon already had sufficient free cash flow at $346 million, whether it needed the full $1.36 billion, and what range of free cash flow Amazon should aim for. Free cash flow is a measure of financial performance that shows how much cash is available for the company to repay creditors or pay dividends and interest to investors. When Amazon stretched its days to pay suppliers from 63 to 72 days, it significantly increased its accounts payable balance, which in turn magnified its free cash flow. However, determining the adequacy of $346 million or the necessity of $1.36 billion for free cash flow depends on numerous factors, including Amazon's operational costs, investment plans, debt obligations, and future growth strategies.

Understanding Amazon's business model is critical when discussing its cash flow requirements. Amazon operates on large scale economies, which allows them to have significant cost advantages, reflected in their low average costs per sale. This is primarily because of their strategic choice to use highly computerized warehouses with low-rent costs around the world, and their ability to offer competitive prices that have successfully challenged traditional bookstores.

While a higher free cash flow can provide greater flexibility and opportunities for a company, there's no one-size-fits-all answer for the range Amazon should maintain. It largely depends on their strategic financial planning and goals. Amazon's historical figures, fiscal strategy, and anticipated projects or expansions would contribute to determining an optimal range for their free cash flow. Therefore, without additional context regarding Amazon's financial requirements and future plans, it would be speculative to define an exact range they should strive for.