Secret of Amazon's Wealth: Settle Bills in 72 Days, Says WSJ

"Take the cash and let the credit go."
Rubaiyat of Omar Khayyam

Of all the factors contributing to the crisis in the publishing industry, slow settlement of bills by the major bookstore chains might well be considered the most grievous. It was bad enough they stalled beyond the traditional 30-day lag adopted by retailers in every sector, but they added another wrinkle that drove many a publisher to the verge of desperation:they paid for new stock by returning slow-moving books for credit. This practice added to the anguish of publishers already starved for cash and drove some into bankruptcy, forced merger or vulnerability to acquisition.

The advent of Amazon.com raised publishers' hope that cash would flow once again. Unlike conventional bookstores, which collect from customers only after books are in the store, Amazon collects from customers in advance. It stands to reason that Amazon could easily settle with publishers within the normal 30-day window.

It comes as a disturbing surprise to learn from Wall Street Journal's Martin Peers that Amazon's settlement time currently runs 72 days. The glacial payment of bills, says Peers, contributes to Amazon's stupendous reserves of working-capital. "Free cash flow has risen to $1.36 billion in 2008 from $346 million in 2003," he points out. It certainly makes Amazon's book value look 9Solomon's mines."But investors shouldn't get too used to it," he adds. "Amazon can't keep extending payment terms with its vendors indefinitely. When it stops, one source of free cash-flow growth will disappear."

Here's the story in full. (As a matter of disclosure, Amazon.com is a retailer for E-Reads print editions and e-books.)

Richard Curtis

Every Blogger owes a debt of gratitude to newspapers and magazines. This posting relies on original research and reporting performed by The Wall Street Journal.