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    Dell's Working Capital - SG7

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    rudy anto
    Dell's working capital policy was a competitive advantage because it sold directly to consumers and manufactured products only after receiving customer orders, allowing it to hold small finished goods inventories. This build-to-order strategy kept costs low and allowed Dell to offer the latest systems at competitive prices. Dell's low cash conversion cycle also stimulated more sales on credit.

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    Dell's Working Capital - SG7

    Uploaded by

    rudy anto
    58 views14 pages
    Dell's working capital policy was a competitive advantage because it sold directly to consumers and manufactured products only after receiving customer orders, allowing it to hold small finished goods inventories. This build-to-order strategy kept costs low and allowed Dell to offer the latest systems at competitive prices. Dell's low cash conversion cycle also stimulated more sales on credit.

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    Dell’s Working Capital - SG7

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    Dell's working capital policy was a competitive advantage because it sold directly to consumers and manufactured products only after receiving customer orders, allowing it to hold small finished goods inventories. This build-to-order strategy kept costs low and allowed Dell to offer the latest systems at competitive prices. Dell's low cash conversion cycle also stimulated more sales on credit.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    58 views14 pages

    Dell's Working Capital - SG7

    Uploaded by

    rudy anto
    Dell's working capital policy was a competitive advantage because it sold directly to consumers and manufactured products only after receiving customer orders, allowing it to hold small finished goods inventories. This build-to-order strategy kept costs low and allowed Dell to offer the latest systems at competitive prices. Dell's low cash conversion cycle also stimulated more sales on credit.

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    Dell’s Working

    Capital
    Dell Computer Corporation was founded in 1984 by then
    nineteen-year-old Michael Dell. The company designed,
    manufactured, sold, and serviced high performance
    personal computers (PCs) compatible with industry
    standards.
    How was Dell’s working capital policy a competitive advantage?

    ❏ Selling straight to consumers


    ❏ Manufacturing cycle that started after a buyer’s order
    ❏ A personalized purchase within a small amount of time.
    ❏ Small finished goods inventory balances
    ❏ Low carrying cost, reinforces custom build-to-order strategy and less expensive to shift promptly
    to the latest technology.
    ❏ Latest systems at the same price as competitors out - dated ones
    ❏ Low cash conversion cycle and more sales can be stimulated on credit basis
    How did Dell fund its 52% growth in
    1996?
    Dell is required $581.67 for the total asset Dell need to maintain its Liability at $491
    in order to achieve the 52% growth in 1996. (excluded Accounts Payable) in order to
    However, they need to maintain the cover the operating asset of $581.67. It’s Net
    proportion of the net asset (at 31.9%) as in
    Profit also gives additional of $227.08.
    1995.

    In Conclusion, Dell need to increase the Operating liability & Net Profit to $714 ($491
    + $227 = $718) in order to tally with the $581.67 operating asset in order to reach the
    52% growth
    Assuming Dell sales will grow 50% in
    1997, how might the company fund this
    growth internally? How much would
    working capital need to be reduced and /
    or profit margin increased? What steps
    do you recommend the company take?
    Income statement projection 1997
    1997 Funding
    PERCENTAGE OF SALES
    TOTAL ASSETS X SALES IN YEAR BEFORE
    = 2148/5296 = 41%

    SHORT TERM INVESTMENT = 591

    OPERATING ASSET = TOTAL ASSET - ST INVESTMENT


    = 1557
    = 1557 * 150%
    =2336

    PERCENTAGE OPERATING SALES IN 1996 =


    = 1557 / 5296 = 29.4%

    ADDITIONAL OPERATING ASSET 1997 = OPERATING ASSET 1997-1996


    = 2336-1557
    = 779
    1997 Funding
    OPERATING LIABILITY IN 1997 AND SALES PERCENTAGE FORECAST ACCORDING TO 1996
    DATA

    TOTAL ASSET - ACCOUNT PAYABLE 1996


    = 2148 - 466
    = 1682
    SALES PERCENTAGE IN 1996 = ASSET 1996- AP 1996/TOTAL SALES
    = 2148-446/5296 = 31,8%
    SO, OPERATING LIABILITY COMES WITH SALES PROJECTION 150% X OPERATING
    LIABILITY
    = 1682 X 150%
    = 2523
    SO LIABILITY INCREASING AND ACCOUNT PAYABLE IS OPERATING LIABILITY - TOTAL
    ASSET - AP
    = 2523-2148-466
    = 841
    1997 Funding
    NET PROFIT MARGIN
    = 5.14%

    SO, CASH FLOW FROM OPERATING PROFIT EQUALS TO :

    PROFIT MARGIN X EXPECTED SALES GROWTH X SALES IN 1996


    = 5,14% X 150% X 5296
    = 408

    CASH IN FLOWS = INCREASE LIABILITY - ACCOUNT PAYABLE + CASH FLOW


    OPERATING PROFIT
    = 1249

    CASH OUTFLOWS = ADDITIONAL OPERATING ASSET


    = 779
    Recommendation

    From the data above we can see the total Cash Inflow is bigger than
    the required Additional Operating Asset. To fund the growth of Dell,
    they also supported with the improvement on the Working Capital
    Management and Profit Margin improvement. This improvement could
    also help Dell in repayment the debt and buyback of shares. Dell as a
    growing company could obtain the funding in order to achieve 50%
    growth in 1997. and the number is sufficient enough to grow.

    Dell funded 1997 growth internally, repaid long-term debt and


    repurchased in equity through a combination of working capital and
    margin improvements.
    How would your answers to Question 3
    change if Dell also repurchased $500
    million of common stock in 1997 and
    repaid its long-term debt?
    Dell also repurchased $500 million of common stock in
    1997 and repaid its long-term debt
    Dell’s initiatives Strategy in 1997 :

    DSI Reducing lead time15 day

    Potential saving = (15x6.344)/365 = $ 261 mio

    DSO Reducing 4 day

    Potential saving = (4x7.944)/365 = $ 87 mio

    DPO Increasing 10 day

    Potential saving = (10x6.344)/365 = $ 173 mio

    According to the preceding computation, if Dell also repurchases $500 million of common stock
    in 1997, the available fund (investment) would increase to $591 million, and the Net Profit will
    be $127, leaving a $464 deficiency.
    The shortfall might then be covered by altering the Cash Conversion Cycle (DSI+DSO+DPO),
    saving $522 in total.
    THANK YOU

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