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
in order to achieve the 52% growth in 1996.
However, they need to maintain the
proportion of the net asset (at 31.9%) as in
1995.
Dell need to maintain its Liability at $491
(excluded Accounts Payable) in order to
cover the operating asset of $581.67. It’s Net
Profit also gives additional of $227.08.

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