Dell’s Working Capital

If Dell were expected to grow at 50% in 1997 with same operating efficiency and
profitability as in 1996, will it be able to fund its growth internally?

Some facts to have in mind beforehand:

Higher asset efficiency:

• Reduced cash, receivables, inventory, and other current assets.

• Needed addl. $447 million of operating assets.
Sources of funds:

• Increase in current liabilities = $187 million.

• Net Profit = $272 million.
Dell’s performance in 1996:

• Dell introduced Pentium technology.

• Unit sales grew by 48%.
• Average unit revenue grew by 3%.
• Gross margin declined by 1% due to aggressive pricing strategies and account mix
shift.
• Net margin improved from 4.3% to 5.1%
• Common stock was issued to employees.
Funding 50% Growth in 1997:

The income statement projection for 1997.

• Operating assets in 1996 = $2148 - $591 =$1557.
• Percent operating assets to sales in 1996 = 1557/5296 = 29.4%.
• Operating assets in 1997 = sales in 1996 x percent operating assets
= 29.4% x $7944 = $2336
• Increasing of operating assets = $2336 - $1557 =$779
• Cash flow from profit = $396
• Financing from current liabilities (without account payable) and retained earnings in
1996 = $473 + $570=$1043
• Percent to sales = 1043/5296 = 19.69%
• Financing from current liabilities (without account payable) and retained earnings in
1996 =19.69% x $7944 = $1565
• Increasing from 1996 to 1996 = $1565 - $1043 = $522
• Total cash flow = $396 + $522 = $918
So, the total cash flow more than operating assets that is required for funding
dell’s operation in 1997.