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Dell’s Working Capital Management

Dell’s Working Capital Management

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Published by Shashank Kanodia

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Published by: Shashank Kanodia on Nov 27, 2011
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Dell’s Working Capital Management Maximizing Sustainable Growth

Dell’s Early Days • Dell began as a small PC company in the mid-1980s • Dell began by buying IBM-compatibles. and selling them directly • Then Dell began making its own PCs – Build-to-order – After receipt of the order – Low finished-goods inventory . upgrading them.

liquidity and profitability . Dell left the retail market – The shift included a change in focus from growth to growth. Dell reported a loss of $76MM • Excess inventory and bad notebooks – In 1994.Dell Expanded. Then Was Harmed • In 1990. Dell began to sell through CompUSA and then others – Dell’s market share leaped to the top 5 after a 268% increase in sales – 2Q93.

inventory better managed • Dell upgraded to seasoned managers – Not rare for former entrepreneurial firms • Major shifts occurred – Re-emphasis on direct contact w/ customers – Focus on Intel processor-based PCs – Began to be able to forecast demand and thus better deal with inventory needs • Flawed Pentium – no problem • Windows Updates – no problem ROC – Return on Capital.1995: Shift to ROC and CFC • Suppliers reduced. CFC – Cash Flow Cycle .

Exhibit 2: Key WC Ratios Exhibit 2 Working Capital Financial Ratios for Dell Inv Daysa A/R Daysb Q193 40 54 Q293 44 51 Q393 47 52 Q493 55 54 Q194 55 58 Q294 41 53 Q394 33 53 Q494 33 50 Q195 32 53 Q295 35 49 Q395 35 50 Q495 32 47 Q196 34 47 Q296 36 50 Q396 37 49 Q496 31 42 A/P Daysc 46 55 51 53 56 43 45 42 45 44 46 44 42 43 43 33 CFCd 48 40 48 56 57 51 41 41 40 40 39 35 39 43 43 40 .

increased profitability • And Exhibit 2: Much lower WC requirements • Examine 1995 – 1996 Balance Sheets – Equity grew by $321MM.Exhibits 4 and 5: Improvement • After a tough year in 1994 – 1995 and 1996 showed high growth. but liabilities grew by less – What does that say about sustainable growth? .

00% 41.32 A(t-1)/E(t-1) 2.63% 100.42 2.72% 1995 1996 • But notice the asset called “Short-Term Investments.14% S(t)/A(t-1) 3.” – Consider ignoring that one… .00% 31.44 Sustainable Growth % Retained 100.05 3.Sustainable Growth • Here are the sustainable growth figures Panel A: Including All Assets NI(t)/S(t) 4.29% 5.

00% 108.W/ and W/out Short-term Investments Panel A: Including All Assets NI(t)/S(t) 4.88 6.05 3.00% 161.29% 5.Sustainable Growth: Fixed Sustainable Growth Calculations .44 Sustainable Growth % Retained 100. invested for income-earning.14% S(t)/A(t-1) 3.90% 1995 1996 What this demonstrates is that once we recognize Dell's non-operational assets.00% 31.61 Sustainable Growth % Retained 100. . we see its stronger sustainable growth.76% 100.72% 1995 1996 Panel B: Excluding Short-term Investments NI(t)/S(t) 4.29% 5.31 4.42 2.14% S(t)/A(t-1) 4.77 A(t-1)/E(t-1) 5.00% 41.32 A(t-1)/E(t-1) 2.63% 100.

1997 Forecasts: Source of Funds? • The case author suggests a 1996 forecast based on fixed liabilities versus proportional liabilities (see result) • He suggests doing the same for 1997 – Also including or excluding share repurchases ($500MM) and payoff of long-term debt – See results of the alternatives – Consider if added funding is needed .

How Working Capital Could Help • Suppose these improvements were made: – Inventory days reduced by 17 – A/R days reduced by 15 – A/P Days increased b y 20 • How much cash would that generate? .

LTD paid off Put options (warrants) were issued .What Actually Occurred in 1997 • Profits were way up – COGS% was reduced – Operating Expense% was reduced • • • • • A/R fell about 12% Inventory Days fell about 40% A/P Days rose sharply. more than 60% Shares were repurchased.

Dell: The Key Points • Dell addressed its working capital management extremely well • Its business strategies of direct sales and of supplier relations were crucial • It created a sustainable growth capacity that resolves many problems raised by the earlier cases we studied .

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