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Copy of Dell Working Capital
Transcript of Copy of Dell Working Capital
Thank you for your attention!
Founded in 1984 by Michael Dell
Their source of income
Dell began distributing its own brand
3)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?
Dell Working Capital Case
Industry rivals’ strategy:
Assembled to forecast, retaining a substantial finished goods inventory
Dell’s main strategy:
Selling straight to consumers and a manufacturing cycle that started after a buyer’s order
A personalized purchase within a small amount of time
Small finished goods inventory balances
1) How was Dell’s working capital policy a competitive advantage?
2) How did Dell fund its 52% growth in 1996?
Dell used internal resouces to fund its growth
Stating the Facts
1995 Total Assets = $1594 million and Short-Term Investments = $484 million
1996 Total Assets = $2148 million and Short-Term Investments = $591 million
From 1995 to 1996 Dell’s performance increased from $3475 million to $5296 million
Operating Assets in 1995 = (1594 – 484)/3475 = 31.94%
Operating Assets in 1996 = (2148 – 591)/5296 = 29.40%
There was a decrease in Operating Assets of 31.94% - 29.40% = 2.54%
2) How did Dell fund its 52% growth in 1996? Continued
Sales in proportion to percentage is ($5296 million - $3475 million)*32% = $582 million
The decrease in Operating Assets means they saved $5295*2.54% = 134.5 million
Since $582 million was the required amount and they saved $134.5 million the total required amount sums up to
$582 million - $134.5 million = $447.5 million as the required amount to sustain its growth
Current Liabilities increased 939-$752 = $187 million from 1995 to 1996
Net Profit in 1996 = $272 million
Based on the calculations the Net Profit and Total Liabilities is larger than the required amount of Operating Asset to sustain its growth. As $272+$187 = $459 million
The required amount to sustain the growth for Dell = $447.5 million
Net Profit of $459 million > $447.5 million hence was Dell is able use internal resources to sustain its growth
Question 3) Operating Asset
Operating assets = total assets- short term investment
= $2,148,000,000- 591,000,000
Operating assets = 1996 operating asset x 50% growth
= $1,557,000,000 x 1.5
With an Increase of sales of 50%, the increase of operating asset from 1996-1997 would be:
Difference in operating asset= $1,557,000,000 -$2,335,500,000
Question 3) Profit Margin
Profit margin = Net Profit/Sales
Net Profit = Profit margin 1996 x Net Sales x 1.5
= 5.136% x $5,296,000,000 x 1.5
Question 3) Liabilities
Sales of Liabilities: Total Liabilities x Sales Growth
= $1,175,000,000 x 0.5
Total Liabilities in 1997= Profit Margin + Percentage Sales of Liabilities + Short-Term Investment:
= $408,003,840 + $58,750,000 + $591,000,000
Question 3) Results
This is well above the required increase of sales in operating asset.
Operating asset: $ 779,000,000
Liabilities: $ 1,057,753,840
Therefore, looking at the liabilities the projected net profit and the current short term investments we can see that Dell will be able to fund the growth internally if the short term investments continue to grow as they have been growing in the past few years.
4) 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?
Repurchase common stock and repaying long term debt.
Cash requirement would increase to $1392 million
$500 million + $113 million + $779 million=$1392 million
Increasing profit margin from 5.136% to 6.136% would result in an increase in net profit of $488 million
Shortfall would be $313 million
Deficit can be obtained by changing cash conversion cycle
Reducing DSI by 3 days saves $52.15 million
Reducing DSO by 7 days saves $152.35 million
Increased DPO by 8 days saves $139.04 million
Total savings of $343.54 million
With the improvements to the cash conversion cycle, the company can pay off the
Dell will be able to internally fund its growth after paying their long term debt of $113 million as well as the repurchase of the common stocks of $500 million
A Small Inventory Balance Means:
Less expensive to shift promptly to the latest technology
Providing the latest systems at the same price as competitors’ out-dated ones
No excess stock doesn’t take up room and absorb capital