Zappos.com's story reads like many dot.com startups. Founder Nick Swinmurn couldn't find a pair of shoes he desperately wanted at local stores or even on the Net. So, in 1999, he founded Zappos to spare others his frustration. His timing was perfect. Zappos' gross sales have increased at a compound annual rate of 119% to an estimated $1 billion this year, making it the No.1 Internet shoe business.
And like many dot.com startups, Zappos rapid growth meant some responsibilities, such as finance, were handled on an ad-hoc basis, rather than through formal arrangements. But with soaring sales and climbing inventory (Zappos stocks approximately 3 million products: shoes apparel, handbags and accessories), the suburban Las Vegas-based success story needed a world-class financial organization.
Amanda Nevins, chief accounting officer and vice president of finance, took on the weighty task of creating accounting, finance and treasury departments–virtually from scratch. "The lack of structure in some ways actually made the process easier," says Daniel Simmons, director of treasury and risk management, one of Nevins' first hires in Treasury. "With a blank canvas, we had a lot of opportunity to create things," he notes.
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The first major project was Operation Loose Change, designed to improve liquidity, increase working capital and reduce borrowing fees. Nevins, Simmons and new recruits Lakshan Fernando, Scott Schaefer, and Sandra Arebalo (a long-time employee who transferred from accounting) immediately ratcheted up analytic capabilities to spin out more accurate forecasts, improved funding negotiation procedures and initiated cross-company communications, reaching out to project management, development, creative services and the customer loyalty team.
Their strategy worked. Loose Change is expected to provide additional cash flow and liquidity in extra financing leverage, according to Nevins.
Zappos' biggest challenge each year is to guarantee that it has enough cash in the third quarter, when inventory investments are high, to carry it into the usually lucrative fourth quarter. A net borrower, the company works from a $100 million revolving line of credit with multiple banking relationships, so any added leverage to increase borrowing helps future expansion of sales and improves immediate cash flow.
Team members hunkered down and in short order, Zappos renegotiated a well-timed increase to its lease covenant from a key financing provider, to $10 million from $3.5 million, acquired KIVA Mobile Fulfillment System (the third in the country to use this technology) to increase productivity and cut costs, acquired a Web site (6pm.com) selling sale items with shorter return windows, implemented a gift card program and store credit program, all of which increased cash flow and liquidity.
Zappos also worked out an agreement with its banking relationships that let it add credit card receivables along with shoe, handbag and accessory inventory as collateral values for justifying borrowing. The result: A $2 million increase in its borrowing base.
Zappos has taken many more actions in the past year to increase credit availability, including negotiating higher credit lines from vendors. Together, these actions prove that Zappos was far ahead of the game in locking down credit in the months before the Wall Street meltdown. "Given the current conditions, these actions certainly have helped liquidity," says Simmons.
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