4 Reasons Why Your Business Is More Profitable Than Amazon
(This post originally appeared on Inc.)
Did you know that your business is more profitable than Amazon.com? Literally.
Sure, Amazon is one of the most well-known companies in the world. And there’s no denying that their current $148 billion market capitalization is likely just a wee bit higher than yours. Or that they employ a few more people (about 110,000) than you or have higher revenues ($74 billion in their last fiscal year). But really and truly, your business is making more money than Amazon.com. In fact, just last quarter, the company lost $126 million and expects to have an operating loss of $810 million this year. Why? According to the company’s chief financial officer, a price war over cloud services, the opening of additional warehouses and significant spending on new content were just a few of the reasons.
So congratulations: your business is profitable and has been for years. Amazon’s is not.
Amazon’s strategy is to invest for the long term, attract more members to their Prime service and gain more market share. As a result, the company loses money or, as in the case of the past few years, makes very, very little money. Maybe this strategy will work. But it’s not your strategy. Your strategy is to make money. Now. And when it comes to earning profits, you’re already doing four smart things that Amazon is not.
Your margins are strong. Last year, Amazon’s gross profit was about $20 billion or 27% of sales. That’s not a bad percentage. But unfortunately their selling, general, administrative and other expenses reduced these profits all the way down to $274 million. In other words, their net profits last year were a measly 1.5% of sales. And as mentioned above, the company is forecasting a loss this current year. You don’t operate this way, do you? You have a handle on your monthly overhead. When you quote out your products you know to price them to not only cover direct costs but also to cover overhead. You know the minimum amount of sales you need each month to be profitable. You avoid selling items that are below a minimum gross profit. You focus your efforts on those items that are most profitable. You are in this to make money. That’s why you’re making more money than Amazon this year.
Your “long term” is different. A big reason why Amazon’s expense are so high is because much of the money spent by the company is considered research and development. Under accounting rules they have to expense these items because future benefits cannot be determined. Maybe the Kindles and the Fire phones and the drones and the cloud services will be big money makers someday (for the record, I believe they will). And it’s exciting to see a company with the foresight to take these chances. But you’ve got a business to run, a family to feed and people to employ. Unlike Amazon, when you buy things for the long term, like equipment, trucks, computers, etc. they go on your balance sheet. That’s because these items do have future benefits. Your “long term” is different than Amazon’s. You’re looking out maybe 2-3 years at most. And you want to see a specific ROI over that time. You know that predicting the future after that is too risky. And you’re OK with that. You don’t need to change the world. You just need to make sure you’re putting your capital to good use without risking more than you have or over-leveraging yourself. This is good management.
You keep to the core. Amazon has expanded way beyond just selling books online. And, to their credit, everything they do and sell (with the exception of their multi-billion dollar a year cloud services business) are intertwined together throughout their consumer marketplace. Most small business owners, like you, don’t gamble in areas outside of their expertise. If they buy a company, it’s a company in their industry. If they invest in a piece of equipment it’s because they know exactly how that asset will produce revenues. You are smart. You don’t dabble in unknown areas. You don’t invest in things you don’t know about. You only have a limited amount of resources and a limited amount of your time to spend. You can’t be expert at everything. You’d like to take a few gambles, a few “can’t miss” opportunities, but you know that’s not a good idea. So you stick to your core. This has always worked for you. This is why your company is still around. This is why you are still generating profits. More profits than Amazon.
You hoard cash. At the end of last year, Amazon had about $8.6 billion in cash and $24.6 billion in current assets. Wow, right? Except that the company also had almost $23 billion in current liabilities. So their current ratio, which is a key metric that we all use to measure our liquidity is almost 1:1. It should be twice that. Yours is probably three times that! Why? Because you’re a smart business owner. You know that things are never as good as they seem. You squirrel away cash for a rainy day because you also know that there will always be rainy days (or likely years) and you’ll need your cash to help you navigate your business through the cyclical economic storms that every business has to face. So even though Amazon has billions in cash, it’s almost all committed. Which means, relatively, you have more cash than Amazon to operate your business.
So congratulations. You’re more profitable than Amazon.com. Your business is better run. You are providing for your family and employees. You are making smart investments. You are pricing your products and services well. You are making money. And unlike Amazon, the media has been ignoring you. Until now.