The gap between a company’s working assets and current liabilities is known as net working capital (NWC). It is a poignant financial indicator that measures a company’s liquidity and can be used as a determinant of the business’ current or short-term financial health. NWC emphasizes how much cash a company needs to maintain its present level of responsibilities without incurring significant debt. Needless to say, successful businesses need to maintain a positive NWC to meet their operational expenses and be able to invest in other strategic initiatives like scaling up or acquisitions.
While NWC of your own business is vital for you to understand the financial or operational gaps to be plugged, if you are a business owner selling on Amazon as a platform, then Amazon’s Net Working Capital is an equally important factor to be considered. After all, the net financial health of the platform has a strong bearing on your own business and its continuity. Let us take a deeper dive into the calculation of the NWC and the components it entails.
Amazon Net Working Capital Calculation
Simply put, the formula to calculate net working capital is:
NWC = (All Current Assets) – (All Current Liabilities)
But this may be oversimplifying things. Current assets can include several types such as the current inventory, cash at hand, cash equivalents, liquid bonds, funds and stocks, accounts receivable, and other marketable investments. Liabilities, meanwhile, may include salaries, accounts payable, loans, credit cards, EMI, and other lines of credit. The difference between assets and liabilities determines the company’s liquidity. As an Amazon seller, Amazon’s net working capital is worth knowing about to understand how it can impact your own business.
It is worth noting that different businesses and sectors may use a different definitions for ‘current’. But, most often, it is considered as the current financial year.
For a company as large as Amazon and considering the turbulent global economy of the recent past, simply considering a 1-year period may not paint a true picture. So, if you consider the data of the last 5 fiscal years (period from 2017 to 2021), Amazon’s net working capital averaged USD -41.76 Bn (approximately). The most recently concluded quarter showed an NWC of USD -44.84 Bn (approximately), which is more negative than the 5-year average. In this period under consideration, 2020 saw the lowest NWC of -USD 61.10 Bn (approximately), which is hardly surprising considering that it was the peak of the global pandemic that resulted in severe lockdowns and a major disruption in order fulfilment-related logistics.
What Does It Mean For You?
If you are alarmed at the high negative number, then don’t be. Some of the leading global giants like Google and Microsoft, too, work with a high negative NWC. The primary reason Amazon’s net working capital is negative is due to the company’s business model that works on receiving payments from customers prior to paying the suppliers and sellers. What actually happens here is that the liabilities (payments towards supplier) inflate due to the delayed timing, as part of the process. And if you recall the formula: NWC = (All Current Assets) – (All Current Liabilities). Naturally, with inflated liabilities, Amazon’s net working capital becomes negative.
This is a promising sign for you as a seller. This indicates that with growth in Amazon’s business there will be a higher cash flow as well. And a cash-rich selling platform bodes well for your eCommerce business.
You should be concerned if a negative NWC occurs due to lack of sales, the decline in customer demands, forced delay in payments (contrary to the process defined delays), insufficient funds, reduced purchase of inventory etc. These are alarming signs, but not applicable in the context of Amazon Inc.
A negative NWC may not be ideal for your own business, since it typically indicates an inability to meet operational expenses like paying the staff, suppliers and other critical aspects of running a business. But when in the context of global marketplaces with massive buyer power, it is a sign of potentially accelerated growth and good future return on capital. Amazon’s working capital and negative cash conversion cycle do not stem from operational efficiency. They are not accidental in nature or a sign of slowdown. On the contrary, they are totally intentional and highly advantageous for you and your business on the platform. The way eCommerce is booming, you too can ride this wave to success.