This tweet sent my back in the Amazon shareholders letters archive:
Disclaimer: my finance and accounting classes are far behind me. This is not financial advice. Just a marketing guy figuring things out. The businesses I'm involved with do not have complexe financial statements and do not operate at Amazon's size. But it's always a pleasure to expand our horizons by learning a few things directly from the boss, Jeff Bezos. In his 2004 annual report, Bezos makes a point about Free Cash Flow.
In overly simple terms, Bezos prefers Free Cash Flow over net income as a metric. Instead of looking at the top line growth (earnings), he'll look at how much cash he has on hand at any given time. And at the growth rate of that pile of cash. His argument is that growing earnings will not necessarily mean that you're growing the pile of cash you need to re-invest in the business. Let's think about this for a while. Growing earnings (monies) doesn't mean I'll have the additional investment opportunities in the future.
Why is he so obsessed with cash? We know the guy takes in a nominal salary and that the business barely turns a profit each year. Well it seems like having cash on hand gives him optionality in the long run – additional optional investment opportunities.
And because the world is complex, we never know where we'll need to focus on 3-5 years from now. Having cash on hand – that cash being free – puts you in a very good position to seize opportunities.
Unless they're extremely well funded, startups do not have good free cash flows. You're stretched, things barely hold together. You're rarely in a good position to reflect on what your options are and where you want to invest your time, ressources and energy.
You can think about Bezos and his obsession about Free Cash Flow. What would he do to make sure that cash is never a problem? And that growth, over time, makes cash even less a problem.
Of course, this applies if you're in it for the long run. If you're not, and you don't mind suffocating your business, take your dividends each year and run. Or pay yourself an exorbitant salary. But if you care about being in a good position in the future, think about freeing your cash flow.