Dell was able to fund its 52.4% sales growth between 1995-1996 internally by reducing operating assets from 31.94% to 29.39% of sales. This released $135 million which, along with a $187 million increase in current liabilities and $272 million profit, exceeded the $448 million needed for projected asset growth. For a projected 50% sales increase in 1997, Dell's $405 million projected profit and $470 million increase in liabilities would cover the $779 million in additional required operating assets through internal financing options like utilizing investments, selling assets, adjusting payment terms or increasing cash sales.
Dell was able to fund its 52.4% sales growth between 1995-1996 internally by reducing operating assets from 31.94% to 29.39% of sales. This released $135 million which, along with a $187 million increase in current liabilities and $272 million profit, exceeded the $448 million needed for projected asset growth. For a projected 50% sales increase in 1997, Dell's $405 million projected profit and $470 million increase in liabilities would cover the $779 million in additional required operating assets through internal financing options like utilizing investments, selling assets, adjusting payment terms or increasing cash sales.
Dell was able to fund its 52.4% sales growth between 1995-1996 internally by reducing operating assets from 31.94% to 29.39% of sales. This released $135 million which, along with a $187 million increase in current liabilities and $272 million profit, exceeded the $448 million needed for projected asset growth. For a projected 50% sales increase in 1997, Dell's $405 million projected profit and $470 million increase in liabilities would cover the $779 million in additional required operating assets through internal financing options like utilizing investments, selling assets, adjusting payment terms or increasing cash sales.
Dell was able to fund its 52.4% sales growth between 1995-1996 internally by reducing operating assets from 31.94% to 29.39% of sales. This released $135 million which, along with a $187 million increase in current liabilities and $272 million profit, exceeded the $448 million needed for projected asset growth. For a projected 50% sales increase in 1997, Dell's $405 million projected profit and $470 million increase in liabilities would cover the $779 million in additional required operating assets through internal financing options like utilizing investments, selling assets, adjusting payment terms or increasing cash sales.
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1/ 11
Dell’s Working Capital
Presented By: Puja Kumari BM-018218 Manish Kumar Jha BM-018219 Pulkit Mathur BM-018220 Purbasha Ganguly BM-018221 Rachit Maheshwari BM-018222 Rachit Sengar BM-018223 Company Background • Dell Computer Corporation was founded in 1984.The company designed, manufactured, sold and serviced high performance personal computers (PCs) compatible with industry standards. • The company also purchased IBM compatible personal computers upgraded and sold the upgraded PCs directly to businesses by mail order. • They began to market and sell its own brand personal computer, taking orders over toll free telephone line and shipping directly to customers which was Dell’s core strategy. Sales primarily generated through advertising in computer trade magazines and catalog. • The build-in-order model enabled dell to deliver a customized order within few days which its competitors couldn’t do. It was also first in industry to provide toll- free telephone and on-site technical support to customers. Dell’s Inventory Management • Dell built computer systems after the company receives the customer’s order. The industry leaders build to forecast and maintain sizeable finished goods in their stock or channel partners. • Dell maintained an inventory of components such as processor chip, comprised about 80% of the cost of PC. Also when new technology replaced old, the prices of components fell by an avg of 30% a year. • Dell order components based on sales forecasts. Michael Dell explained “other companies had to maintain high levels of inventory to stock and retail channels. Because we built only what our customer’s wanted when they wanted it, we didn’t have a lot of inventory taking space and soaking capital”. Dell’s Technology Upgradation • Dell became the first manufacturer to convert its entire major product line to the Pentium processor in July 1995. Where the Pentium chip was at 133 MHz with ninth upgrade. As compared to its rivals Dell was able to offer faster systems at the same price with new Pentium technology. • Due to its low finished goods inventory Dell didn’t have to de-construct PCs to replace microprocessor when Pentium chip was bought in 1994. It was able to quickly update the system where others were still selling flawed systems. • Similarly Dell was able to begin systems equipped with Microsoft Corporation’s new Windows 95 operating system the same day Microsoft launched the product. • Due to the property of direct marketer, Dell was able to bring new component technology to the market within an average of 35 days. Assessing Dell’s working capital competitive advantage. Dell has policy of maintaining low inventory because of its build-to-order model and selling directly to customer. This results in following advantages: • Defects in raw material can be easily wiped out • Low inventory maintenance cost as compared to competitors • Upgradation to new technology became faster • Low inventory conversion period which results in low cash conversion cycle • High inventory turnover ratio Assessing Dell’s working capital competitive advantage. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑ൗ 360
Dell IBM Apple Compaq
Inventory Conversion 32 48 54 73 Period (in Days) Cost of Goods Sold ($ mn) 2737 2737 2737 2737 Inventory ($ mn) 243 365 411 555 Inventory Turnover Ratio 11.25 7.50 6.67 4.93 Determine how Dell funded its fiscal 1996 sales growth. • Total sales growth from 1995 to 1996 is 52.4 %. • Operating Assets = Total Assets – Short-term Investments
• Percentage decrease in Operating Assets as percentage of
Sales = 31.94 – 29.39 = 2.55% • Decrease in Operating Assets, $5296 * 0.0255 = $135.04 mn. Determine how Dell funded its fiscal 1996 sales growth. • Thus when sales grew by 52.4%, the operating assets must be increased in same proportion in order to meet expenses. So, the amount needed by Dell in order to fund its 52.4% increase in sales is given by, • Estimated operating assets requirements, ($5296 - $3475) * 0.32 = $582.72 mn • Actual operating assets requirements, $582.72 - $135.04 = $447.68 mn • Projected profit for year 1996 (4.3% of Sales), $5296 * 0.043 = $227.72 mn • Actual profit for year 1996 = $272 mn. Determine how Dell funded its fiscal 1996 sales growth. • Increase in Current Liabilities from year 1995 to 1996, $939 - $752 = $187 mn • Increase in Current Liabilities + Actual profit = $272 + $187 = $459 mn which is greater than actual operating assets requirements ($447.68 mn). • Therefore, Dell was able to fund its 1996 sales growth internally i.e., by reducing its operating assets which led to higher net profit margin. Evaluate Dell’s internal funding options for projected sales growth of 50% in fiscal 1997. • Percentage increase in Sales = 50%. Hence, operating assets will also increase in same amount. • Operating Assets in 1997, ($2148 - $591) * 1.5 = $2336 mn. • Additional Operating Assets required from 1996 to 1997, $2336 - $1557 = $779 mn. • Net profit as percentage of sales in 1996 = 5.1%. Assuming it same for 1997 we get, • Net profit as a percentage of sales, $5296 * 1.5 * 0.051 = $405.14 mn • Increase in Current Liabilities for 1997, $939 * 0.5 = $469.5 mn. Evaluate Dell’s internal funding options for projected sales growth of 50% in fiscal 1997. • Net Profit + Increase in Current Liabilities we would have $874.64 mn which exceeds the additional operating assets required ($779 mn). • Thus, with an increase in current liabilities of $469.5 mn and a forecasted profit of $405.14 mn, Dell will have enough to fund its operations internally by following alternatives: • Dell could fund the growth with short-term investments ($591 mn) and their net profits, if the cost of increasing their long term debt is too high. • Dell could either sell its fixed assets or reduce inventory. • Dell could adjust its payment terms with its debtors and its creditors in order to achieve a negative cash conversion cycle. • Dell could increase cash sales instead of credit to reduce their days sale outstanding (DSO).
