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    Dell Working Capital Solution

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    IIMnotes
    Dell was able to grow sales 52% in 1996 without increasing leverage or issuing additional equity shares by improving asset efficiency and profitability. Dell's days sales outstanding, days inventory outstanding, and cash conversion cycle were all lower than competitors, allowing Dell to fund growth internally. Actual 1996 results showed Dell was able to grow operating assets to only 29% of sales compared to a projected 32% without requiring additional funding.

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    Dell Working Capital Solution

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    IIMnotes
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    Dell was able to grow sales 52% in 1996 without increasing leverage or issuing additional equity shares by improving asset efficiency and profitability. Dell's days sales outstanding, days inventory outstanding, and cash conversion cycle were all lower than competitors, allowing Dell to fund growth internally. Actual 1996 results showed Dell was able to grow operating assets to only 29% of sales compared to a projected 32% without requiring additional funding.

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    Solution of Dell working capital

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    Dell was able to grow sales 52% in 1996 without increasing leverage or issuing additional equity shares by improving asset efficiency and profitability. Dell's days sales outstanding, days inventory outstanding, and cash conversion cycle were all lower than competitors, allowing Dell to fund growth internally. Actual 1996 results showed Dell was able to grow operating assets to only 29% of sales compared to a projected 32% without requiring additional funding.

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    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    5K views10 pages

    Dell Working Capital Solution

    Uploaded by

    IIMnotes
    Dell was able to grow sales 52% in 1996 without increasing leverage or issuing additional equity shares by improving asset efficiency and profitability. Dell's days sales outstanding, days inventory outstanding, and cash conversion cycle were all lower than competitors, allowing Dell to fund growth internally. Actual 1996 results showed Dell was able to grow operating assets to only 29% of sales compared to a projected 32% without requiring additional funding.

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    The key takeaways are that Dell achieved much lower inventory levels than its competitors by keeping inventory to cover only 32 days of sales compared to Compaq's 73 days. This led to huge savings in working capital and higher profits for Dell.

    Dell achieved lower inventory levels than its competitors by keeping inventory to cover only 32 days of sales compared to Compaq's 73 days of sales for Compaq. This allowed Dell to reduce obsolescence risk and lower inventory costs.

    The advantages of Dell's lower inventory approach were reduced obsolescence risk, lower inventory costs, lower inventory losses implying higher profits, ability to offer newer systems at lower prices than competitors' older systems, and avoiding component shortages and order backlogs.

    Dell's DSI about half the level of its competitors.

    leading to huge savings in working capital Jan-95 Dell Compaq Inventory to cover 32 days of Sales 73 days of Sales

    Addnl. Inventory reqd. by Dell at Compaq's DSI of 73: 1995 Dell's COS 2,737 7.60 311.71 Addnl. Inventory 312 M 20 M increase in PBT leading to Conservation of Capital

    Low component inventory reduces obsolescence risk and lowers inventory cost. Value of inventory reduces 30% p.a.

    Lower inventory losses imply higher profits. Compaq had to market both new & older systems. Older systems were discounted, leading to cannibalization of sales of new systems. Dell able to grow sales by offering faster systems at prices of competitors' slower machines. Component shortages had order backlogs, leading to cancellation of some orders. Overall, rapid technological changes in industry made advantages of Dell's approach outweigh the disadvantages.

    Dell

    10.71% 3.212%

    Compaq 20.30% Inventory as % of COS 6.090% Inventory loss as % of COS Addnl. Contribution to Profit for Dell due to lower component inventory & effect of price 78.8 reductions

    ower machines.

    approach outweigh the disadvantages.

    Incremental Sales in 1996 Addnl. Operating Assets (32%) (Total Assets - ST Invest.)

    In USD M 1,821 582

    5296 52% 4.29% 227

    Forecasted 1996 Balance Sheet (In USD M) 1995 Actual Y.E. Jan 29, 1995 % 0f 1995 Sales Current Assets: Cash ST Investments A/R, net Inventories Other Total Current Assets P, P & E, net Other Total Assets Addnl. Funding Needed Current Liabilities: A/P Accrued & Other Liabilities Total Current Liabilities Long Term Debt Other Liabilities Total Liabilities Stockholders' Equity: Preferred Stock Common Stock Retained Earnings Other Total Stockholders' Equity 43 484 538 293 112 1,470 117 7 1,594 1.24% 13.93% 15.48% 8.43% 3.22% 42.30% 3.37% 0.20% 45.87% 31.94%

    403 349 752 113 77 942

    11.60% 10.04% 21.64% 3.25% 2.22% 27.11%

    120 242 311 -21 652 1,594

    18.76% 45.87%

    As of 1995, Dell would be projected to be able to grow at 52% without increasing its leverage and Actual 1996 Balance Sheet Compared to Projections Y.E. Jan 28, 1996 Current Assets: Cash ST Investments A/R, net Inventories Other Total Current Assets P, P & E, net Other 29% Total Assets

    Forecast for 1996 Fixed Liabilities 66 484 820 447 171 1,987 178 11 2,176

    55 591 726 429 156 1,957 179 12 2,148

    Addnl. Funding Needed Current Liabilities: A/P Accrued & Other Liabilities Total Current Liabilities Long Term Debt Other Liabilities Total Liabilities

    354

    466 473 939 113 123 1,175

    403 349 752 113 77 942

    Stockholders' Equity: Preferred Stock 6 Common Stock 430 Retained Earnings 570 Other -33 49 Total Stockholders' Equity 973 879 Common stock to employees 2,148 2,176 5.10% 45 227 Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitab

    of Sales in 1996, as compare 924 49

    additional equity issued

    Growth in 1996 sales Actual net profit margin in 1995

    4.29% 1995 Actual Net Profit Margin 227 Projected Net Profit for 1996 227

    2,176 Forecast for 1996 with Actual 1996 Sales Fixed Liabilities Prop. Liabilities 66 484 820 447 171 1,987 178 11 2,176 354 66 484 820 447 171 1,987 178 11 2,176 (80)

    1,692 582

    582 (80)

    403 349 752 113 77 942

    614 532 1,146 113 117 1,376

    211

    879 2,176

    879 2,176

    ithout increasing its leverage and issuing further equity shares.

    Variance

    Y.E. Jan 28, 1996

    Forecast for 1996 Proportional Liabilities 66 484 820 447 171 1,987 178 11 2,176

    Variance

    -11 107 -94 -18 -15 (30) 1 1 (28)

    55 542 726 429 156 1,957 179 12 2,148

    -11 58 -94 -18 -15 -30 1 1 -28

    -135

    (80)

    63 124 187 46 233

    466 473 939 113 123 1175

    614 532 1146 113 117 1376

    -148 -59 -207 0 6 -201

    17.7%

    94 (28)

    6 430 570 -33 973 2148

    879 2,176

    94 (28)

    973

    ng its asset efficiency and profitability. Total Operating assets at 29% 5.1% vs. 4.3% of Sales in 1996, as compared to projected 32%

    5.14% NP Margin 1996 20.15% GP Margin 1996 21.24% GP Margin 1995

    107

    135

    582 447

    58 Extra Actual Funding in 1996

    forecast vs. actuals -67

    63 124

    505 Total Increase in Funding in 1996 over 1995

    46

    45

    272 Increase in Equity w/o 49 -22

    Addnl. Sales Addnl. Operating assets Forecasted 1997 Balance Sheet (In USD M) 1996 Actual

    2,648 779

    Y.E. Jan 28, 1996 Current Assets: Total Assets Addnl. Funding Needed Current Liabilities: 2,148 To fund the shortfall of 984 M 44 days of sales through increased asset efficiency, Dell needs 56 days of COGS Current CCC 40 days CCC has to become negative to fund the shortfall of 984 M HOW? Savings from Hypothetical WC improvements DSI 1997 Projected Hypothetical improvements * Daily Savings Annual Savings Total Savings in USD M 14 17 17.6 299.55 983 2,148

    % 0f 1996 Sales 41% 29.40%

    41%

    DSO 27 15 22.1 331.00 904

    Improvement in Profitability in 1997 can also eliminate the shortfall of 984 M - 1% increase in margin will inc Margin improvements reduce the required working capital improvements as above - A combination of both seems to be the only reasonable alternative to fund the shortfall. Repurchase of Stock indicates under valuation in the market and leads to increase in value. Actual profit margin 1997

    6.68% ST Inv. Increased to 1237 M from 5 LT debt reduced to 18 M from 113 M Common stock reduced from 430 M Inventories 251 M 903 M A/C Rec., 1040 M A/c payab 37

    Actual 1997 CCC

    13

    408 Projected 1997 Net Profit 5.1% Daily COGS 17.6 56 Forecast for 1997 with a 50% Sales Increase Debt repaid & $500 Equity Fixed Liabilities Prop. Liabilities Buyback 779 2,927 371 2,927 (161) 2,927 984

    2,927

    2,927

    2,927

    DPO 53 20 17.6 352.42

    CCC -12

    % increase in margin will increase net income by 79 M. ove - A combination of both profitability & WC improvements

    ase in value.

    7759 M sales, 518 M v. Increased to 1237 M from 591 M bt reduced to 18 M from 113 M mon stock reduced from 430 M to 195 M tories 251 M A/C Rec., 1040 M A/c payable 54 (4)

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