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Analysis of Working Capital Management of

Dell Computer Corporation

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 Analysis of Working Capital Management of Dell Computer
Corporation

Submitted to:
Mrs. Khaleda Khatun
Professor
Department of Finance
University of Dhaka

Submitted by:
Group No: 15
4th Year, 1st Semester
BBA 23rd Batch
Section: A
Department of Finance
University of Dhaka

A combined effort by:

Sl. No. Name Student ID Remarks
1 MD. Mozammel Haque Riyad 23-065
2 Bishakha Roy 23-101
3 Pranta Roy Chowdhury 23-104
4 MD. Tanvir Rahman 23-113
5 Md. Nowshad Ayub 23-135

Date of Submission: September 20, 2020

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 Letter of Transmittal

September 20, 2020

Mrs. Khaleda Khatun
Professor
Department of Finance
University of Dhaka
Subject: Submission of Report on “Analysis of Working Capital Management of Dell
Computer Corporation”

Dear Ma’am,

Here is the report on Analysis of working capital management of Dell Computer Corporation
as per our requirement for course F-405; Working Capital Management.

Though we are in a learning curve, this report has enabled us to gain insight into the financial
analysis and working capital management. It has been extremely challenging and interesting
for us. We are confident that this knowledge will prove to be of utmost value and importance
to us in future.

We have put our sincere effort to make this report a presentable shape and make it as
informative and precise as possible. We hope that any unintentional error, omission or
mistake committed by us while preparing this report will be considered with sympathy.

Sincerely yours
Group No: 15
4th Year, 1st semester
Section: A
BBA 23rd Batch
Department of Finance
University of Dhaka

Signature
Md. Tanvir Rahman
(On behalf of the whole group)
Roll: 23-113
Sec: A
Department of Finance
University of Dhaka

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 Acknowledgement

Successful completion of any kind of report requires help from several sources. We have also
taken help from our course instructor. So, we don’t deserve all the praise. Our course teacher
Professor Mrs. Khaleda Khatun helped us by providing us with her valuable advice and
guidance.

For any BBA student course report is an essential part for his educational life. One can gather
a lot of practical knowledge and experience by observing and doing the work of allocated
report. In this regard, our report has been arranged based on Analysis of Working Capital
Management of Dell Computer Corporation.

First of all, we would like to express our gratitude to Almighty Allah for enabling us to
complete this report.

Then, we would like to thank our F-405, Working Capital Management, course instructor,
Professor Mrs. Khaleda Khatun of Department of Finance, University of Dhaka. Her constant
presence and words of encouragement inspired us to do our very best. It would probably be
impossible to complete this report without her guidance and availability.

This report is prepared for meeting our academic purpose, not for any other reason. It might
not be used for the benefit of any other purposes.

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Contents

Executive Summary ................................................................................................................... 6

Case Overview .......................................................................................................................... 7
Strengths of Dell Computer Corporation .............................................................................. 8
Problem Statement for Dell Computer Corporation ............................................................ 8
Corrective Steps Taken by Dell Computer Corporation ..................................................... 9
Financial Data Analysis of Dell Computer Corporation ...................................................... 9
Question (1): How was Dell’s working capital policy a competitive advantage over its
competitors? ............................................................................................................................. 11
Question (2): How Did Dell Fund It’s 52% Growth In 1996? ............................................... 11
Question (3): Assuming Dell sales will grow 50% in 1997, how might the company fund this
growth internally? .................................................................................................................... 13
Projected Balance Sheet:...................................................................................................... 14
Calculation of CASH CONVERSION CYCLE: ................................................................. 14
Question (4): How much would working capital needed to be reduced? ............................... 15
Question (5): How would your answer to question number 3 change if Dell also repurchase
$500 million of common stock in 1997 and repaid its long-term debt? .................................. 17

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 Executive Summary
The report is consistent with a case that follows the real-life scenario of Dell Computer
Corporation. The emergence of the corporation, its techniques, high points in market share,
the low points in the life cycle where the business faced capital problems and other issues
have been presented in the report about the case study. Dell Computer Corporation came in to
spot light when the company managed to secure 52% sales growth nearly 32% more than the
industrial average in 1996.
The business operated through the Build to order system, which enabled Dell to focus on
custom made computers for their customer. Selling directly to the customers and the
inventory management systems were the core strategy of Dell. Things were going
accordingly, and dell registered 268% sales growth compared to the industry growth rate of
5%. This led Dell into the top five market share holders.
In August 1993 Dell reported a $76 million-dollar loss, the first loss the company had
incurred. In order to pout this fallback behind them Dell Immediately shifted its focus from
only growth to liquidity, profitability and growth. In July 1995 Dell became the first
manufacturer to convert its entire product line to Pentium technology. In the fiscal year 1996
Dell reported revenue of 5.3 billion dollars with net income of 272 million. 52% growth from
the prior year.
The reports main part is consistent with the answer of 5 fundamental questions about the
working capital management of the company. The question provides us with different
situations regarding the working capital management of the company. In the answer of the
question number one it is stated how Dells inventory management worked as a competitive
advantage. Dell Computer’s direct connection with the customers lead them to have pre-order
first and in accordance with the customers’ needs the computers are made. Here, this build-
to-order model of theirs have led them to place less investment as they do not need much
more fixed costs in terms of storing relevancies
In the answer number two it is explained how the company funded its 52% growth in 1996.
The answer explains that by reducing the liabilities and increasing the profitability this
company has utilized its growth fund.
In the third answer it is shown that if the company grew by 50% in 1997, the company can
fund its additional $779 million operating assets with the help of net profit, existing short-
term investment and increase in short term liability.
In the fourth answer we have explain how the company can act in terms of what steps the
company should take when fond comparing to the current working capital level reflecting
that working capital may be reduced by 71 million this means that dell is lacking in terms of
proper utilization of its assets.
In the final answer, the scenario where the company repurchases stocks and repayment of
debt is explained, the investment requirement would shoot up by $613mn to become $1392
million. The funding would see Short term investment of $591mn. The profit margin can be
increased by 2% to yield an additional $148mn in funds. The shortfall left of is 653 million.
These funds can be obtained by modifying the cash conversion cycle and increasing current
liability.

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 Case Overview
The case follows real life scenario of Dell Computer Corporation. The emergence of the
corporation, its techniques, high points in market share, the low points in the life cycle where
the business faced capital problems and other issues have been presented in the case study.
Dell Computer Corporation came in to spot light when the company managed to secure 52%
sales growth nearly 32% more than the industrial average. The innovative techniques and the
decisions that the company took is the main focal point of the study.
Dell was founded in 1984 by a nineteen-year-old teenager Michael Dell. In the beginning
stage of the company it designed, manufactured and sold high performance personal
computers compatible with industry standards. In the early stage dell used to purchase IBM
computers, upgraded them and then sold them to direct customers. But later it started to
market and sell their own branded personal computers.
Selling directly to the customers and the inventory management systems were the core
strategy of Dell. Sales were generated through advertisement. The business operated through
the Build to order system, which enabled Dell to focus on custom made computers for their
customer. And this method also ensured that Dell had to keep low unused inventory which
freed cash for other business purposes. The other business leaders sold at forecasted method
which led them to higher inventory cost. The order to build method ensured Dells inventory
efficiency.
From 1990 to 1993 the company had to face financial trouble as it had to take aggressive
growth policies to ensure it survived the global economic growth. In 1990 dell started to sell
their products through indirect distributors in order to capture the market share. Additionally,
the company also continued its aggressive pursuit of foreign markets. Things were going
accordingly, and dell registered 268% sales growth compared to the industry growth rate of
5%. This led Dell into the top five market share holders.
In August 1993 Dell reported a $76 million-dollar loss, the first loss the company had
incurred. The company also took some bad decision such as inefficient restructuring changes
to consolidate European business and an ineffective notebook plan. This led Dells profit
margin to fall to 2%. The main reason behind this was the lack of attention given to cash
flows and working capital in hand.
In order to pout this fallback behind them Dell Immediately shifted its focus from only
growth to liquidity, profitability and growth. It adopted companywide metrics focusing on the
new targets. 1994 the company exited the low margin indirect retail channels. The company
took new measures to improve its internal systems. These changes combined with Dells new
entry in the notebook market and its rapid introduction of Intel’s Pentium microprocessors
fueled the recovery.
In July 1995 Dell became the first manufacturer to convert its entire product line to Pentium
technology. Because of its low finished goods inventory dell was able to offer faster systems
at the same price rivals were marketing old Pentium technology. In the fiscal year 1996 Dell
reported revenue of 5.3 billion dollars with net income of 272 million. 52% growth from the
prior year.

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 Strengths of Dell Computer Corporation
Direct Sales: Selling directly to the customers was the core strategy of Dell. Sales were
generated through advertisement. This enabled the company to ignore the cost and delayed
faced from using the indirect distribution process.

Build to Order System: Dell combined this low-cost sales/distribution model with a
production cycle that began after the company received a customer’s order. This build-to-
order model enabled Dell to deliver a customized order within a few days, something its
competitors could not do. Dell was also the first in the industry to provide toll-free telephone
and on-site technical support in an effort to differentiate itself in customer service.

Inventory System: Dell built computer systems after the company received the customer’s
order. In contrast, the industry leaders built to forecast and maintained sizeable finished
goods inventory. Dell’s build-to-order manufacturing process yielded low finished goods
inventory balances. By the mid-1990s Dell’s work-in-process and finished goods inventory as
a percent of total inventory ranged from 10% to 20%. This contrasted sharply with the
industry leaders, whose WIP and finished goods inventory typically ranged from 50% to
70%. Dell’s supply of inventory was significantly lower than its competitors, providing a
competitive advantage.

Problem Statement for Dell Computer Corporation

Challenge of Growth: Dell anticipated that the fragmented PC industry was ready for a
consolidation and that Dell was too small to survive a consolidation. Dell had two options,
staying with the current business plan and same size or go for growth, Dell went with the
growth option. The new growth plan created substantial new changes to the business plan.

Changing The Direct Selling Method: On September 10, 1990, in an attempt to capture
sales from small businesses and first time consumers, Dell announced it was breaking from
its direct only business model and would begin to sell its products through indirect
distributors.

First Big Time Loss: In August 1993, Dell reported a $76 million-dollar loss for the
second quarter of 1993, its first loss. The company also took restructuring charges to
consolidate European operations that had become redundant and inefficient. Dell’s profit
margin fell to 2% for the first quarter, ending May 2, 1993, – well below the company’s
target of 5% that they had achieved or exceeded for 11 consecutive quarters.

Lack of Attention To Cash Flows and Working Capital: Dell got to concerned with
the profit loss statements and gave little focus on the liquidity and cash flows. The lack of
efficiency in cash flow and working capital management were later marked as the key
reasons for the downfall that nearly led the company to be closed.

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 Corrective Steps Taken by Dell Computer Corporation
Shifting Focus To Liquidity, Profitability and Growth: Dell shifted its focus from
exclusively growth to liquidity, profitability, and growth. It adopted company-wide metrics
around the new focus. Late in 1995, Dell instituted goals on ROIC (Return on Invested
Capital) and CCC (Cash Conversion Cycle).

Exiting Indirect Retail Channel: In July 1994, less than a year after shifting the
company’s focus, Dell exited the low margin indirect retail channel.

Improvement in Internal System And Inventory Control : Dell took measures to

improve its internal systems for forecasting, reporting, and inventory control. A new vendor
certification program was put in place, reducing the number of suppliers, ensuring component
quality, and improving delivery performance. Dell also brought in seasoned managers to lead
the company during its next stage.

Introduction of Pentium Microprocessor Technology: In July 1995, Dell became the

first manufacturer to convert its entire major product line to the Pentium technology. Dell
was able to offer faster systems at the same price that rivals were marketing older Pentium
technology. Because of its low finished goods inventory, Dell didn’t have to dismantle PCs to
replace the microprocessor when Intel Corporation discovered its Pentium chip was flawed in
1994.

Financial Data Analysis of Dell Computer Corporation

Working Capital Financial Ratios for Dell: The working capital ratios of different quarters
have been provided in the case. From this ratio table below, we will try to interpret the
importance of working capital and the effects of the steps taken by the company to reinforce
liquidity.

DSI DSO DPO CCC

Q193 40 54 46 48
Q293 44 51 55 40
Q393 47 52 51 48
Q493 55 54 53 56
Q194 55 58 56 57
Q294 41 53 43 51
Q394 33 53 45 41
Q494 33 50 42 41
Q195 32 53 45 40
Q295 35 49 44 40
Q395 35 50 46 39
Q495 32 47 44 35
Q196 34 47 42 39
Q296 36 50 43 43
Q396 37 49 43 43
Q496 31 42 33 40
Where,
DSI (Days Sales of Inventory) = Net Inventory / (Quarterly COGS/90).
DSO (Days Sales Outstanding) = Net Accounts Receivables / (Quarterly Sales/90).

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DPO (Days Payables Outstanding) = Accounts Payables / (Quarterly COGS/90).
CCC (Cash Conversion Cycle) = DSI + DSO – DPO.
In the year 1993 Dell was under the system of indirect selling and their top priority was
aggressive growth. For this reason, the DSI, DPO and CCC were very high at that time
Indicating inefficient turnover of working capital which led to the big loss in 1993.
In July 1994, less than a year after shifting the company’s focus, Dell exited the low margin
indirect retail channel. Dell instituted goals on ROIC (Return on Invested Capital) and CCC
(Cash Conversion Cycle). The company took measures to improve its internal systems for
forecasting, reporting, and inventory control. A new vendor certification program was put in
place, reducing the number of suppliers, ensuring component quality, and improving delivery
performance.
These measures led the working capital ratios specially DSI, DPO and CCC to improve
sufficiently. The DSI ratio fell from 50days or so to 30 days margin. The DPO ratio fell from
50 days or so to 40 days. These eventually led to a healthy efficient CCC ratio.
These improvements led to higher return and higher profit revenue for the company. So, as
we can see from the financial working capital measures, the company in the right time shifted
its focus from aggressive growth to liquidity and it yielded an efficient and potentially
company saving return.

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Question (1): How was Dell’s working capital policy a competitive
advantage over its competitors?
Dell Computer’s direct connection with the customers lead them to have pre-order first and in
accordance with the customers’ needs the computers are made. Here, this build-to-order
model of theirs have led them to place less investment as they do not need much more fixed
costs in terms of storing relevancies. And that ultimately leads the company to enjoy full
benefits of products’ costs reduction and introduction of new products as soon as possible
than the competitors. There are other several advantages like the low component inventory
reduces the obsolescence risks and that results in the inventory costs.

Here, Dell’s inventory was almost 9% of its COGS where the Compaq’s inventory was
almost 20% and that reflects that if there is any anomaly because of the technological
changes or by anything by 50%, then Dell will have to occur 4.5% loss of COGS and on the
other hand, Compaq will have to bear loss of 10% of COGS. And that will have positive
effect on the profit of the company. Like the COGS of Dell in 1995 is 2.7 billion USD and
the effect of component price reductions will contribute (in comparison with Compaq) about
(2.7*(10%-4.5%))= 148.5 million USD.

In accordance with the case scenario, it is ocular that cannibalization was a significant issue
because of its low inventory process and its just in time model.

Question (2): How Did Dell Fund It’s 52% Growth In 1996?

Sales Portion
Total assets 1594 46%
Short-term investments 484 3475 14%

Here, in 1995, total assets were 46% of its sales and short-term investments were 14% of its
sales. If it is assumed that short-terms investments were not required to back-up the
operations, then Dell would have required 32% of increased sales in additional operating
assets.

1995 1996 Increase

Sales 3475 5296 52%

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Here, if Dell required an increase in operating assets as much as 32% = (46%-14%) then the
increase in sales would be: (1821m*32%)=582m USD. Additional investments in operational
assets would be necessary.

Here, 1821m= (4296m-3475m).

So, in terms net income the additional funding requirement would be: (582-227)million= 355
million.

1995 1996
Operating assets 1110 1692

Funds required: (1692-1110) =582 million.

Sources of funds:

Here, profit margin in 1995, will be 4.3%= (149/3475).

Then Dell would have realized operational profit, (5296*4.3%) = 227.08 million.

Increase in (TE-A/P) = (2148-466)-(1594-403)= 494 million

So, total cash inflow= (227+494) = 721 million

Year 1996
total assets 2148 mn
Short term investments 591 mn
Operating assets 1557 mn

Operating assets’ percentage against the sales in 1996 (1557/5296) = 29.40%.

Assuming the approximate constant growth rate, the approximate sales growth rate has been
determined 50% and that is why sales in 1997 will be (5296+ (5296*50%))=7944 million
USD.

Operating assets in 1997= (7944*29.40%)million USD = 2336 Million USD.

1996 1997 Differences

Operating assets 1557 2336 779

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Sources of fund 1996 1997 1996
TL and E 2148 Sales 7944 5296
A/P 466
Portion 0.317598187
Forecasted liabilities increase except A/P 2523
Increase 1996 to 1997 841

Net profit to sales in 1996 0.051359517

Forecasted net profit in 1997 408

total cash inflow more than required cash outflow 1249

In brief, by reducing the liabilities and increasing the profitability this company has utilized
its growth fund.

Question (3): Assuming Dell sales will grow 50% in 1997, how
might the company fund this growth internally?

For the required funds to grow at 50% in 1997, we must forecast the balance sheet and
income statement of 1997. We forecast the balance sheet and income statement based on the
assumption of 50% growth. For all the assumptions, assets are based on 1996 sales ratios
except for investment in short term assets in 1996. In the year of 1996 the assets except
Investment in short term were 30% of total sales. Additional sales due to the assumed growth
of 50% which was $2648 million.
It is assumed that the profit margin will remain constant at 5.14%. Here, after 50% growth,
sales will be $7,944 million and net profit will be $408 million. Tax rate is 29%.

Forecasted Income Statement 1997

Fiscal Year 1996 1997
Sales 5296 7944
Cost of sales 4229 6344
Gross Margin 1067 1601
Operating Expense 690 1035
Operating Income 377 566
Finance and Other Income 6 9
Income Taxes 111 167
Net profit 272 408

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Projected Balance Sheet:

Forecasted Balance sheet 1997

28-Jan-96 %of sales 31-Jan-97
Current Asste
Cash 55 1.0% 83
Short Term Investment 591 591
Accounts Receivables, net 726 13.7% 1089
Inventories 429 8.1% 644
Others 156 2.9% 234
Total Current Assets 1957 2640
Property Plant And Equipment, net 179 3.4% 269
Others 12 0.2% 18
Total Assets 2148 2927
Current Liabilities
Accounts Payable 466 8.8% 699
Accured and Other Liabilities 473 8.9% 710
Total Current Liabilities 939 17.7% 1409
Long term Debt 113 113
Other Liabilities 123 123
Total Liabilities 1175 1645
Stockholders Equity
Preffered Stock 6 0.1% 9
Common Stock 430 8.1% 645
Retained Earnings 570 10.8% 855
Other -33 -0.6% -50
Total Stock Holders Equity 973 1460
Total Equity and Liabilities 2148 3104

Calculation of CASH CONVERSION CYCLE:

We found out DSI, DSO and DPO by considering the average of 4 years.
Average of DSI, DSO and DPO of 4 years is,
DSI DSO DPO
Q193 40 54 46
Q293 44 51 55
Q393 47 52 51
Q493 55 54 53
Q194 55 58 56
Q294 41 53 43
Q394 33 53 45
Q494 33 50 42
Q195 32 53 45
Q295 35 49 44
Q395 35 50 46
Q495 32 47 44
Q196 34 47 42
Q296 36 50 43
Q396 37 49 43
Q496 31 42 33
Average 38.75 50.75 45.69

CASH CONVERSION CYCLE 43.81

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 Operating Assets in 1996 1557
Operating Assets in 1997 2336
Additional operating assets needed to sustain growth 779
Dell can fund this growth internally with profit or retained earnings, short term investments
and increase in current liability as these liabilities are not yet paid these are considered as
cash inflow.

Internal sources of finance Amount

1. Profit $408
2. Short term investments $591
3. Increase in current liability $470
Cash inflow $1,469

It is possible for them to fund the growth internally. They have a Financial Surplus of $1469
million. Additional operating asset is required to sustain the growth779. The increase in the
current liability acts as source of funds, which is 470Estimated increase in net profit to reach
the figure of $408. The short-term investment is assumed to stay the same as year 1996 at
591$ million. Hence, we can safely say that the growth will be internally funded.

Question (4): How much would working capital needed to be

reduced?

Jan 28,1996 Jan 29,1995 Jan 30,1994

Current assets
Cash 55 43 3
short term investments 591 484 334
account receivables, net 726 538 411
Inventories 429 293 220
Others 156 112 80
Total curre nt as s e ts 1957 1470 1048
current liabilities
accounts payable 466 403 _
accrued & other liabilities 473 349 _
Total curre nt liabilitie s 939 752 _
Ne t working capital 1018 718 1048

To determine a precise estimate of the value by which working capital need to be reduced, we
need to estimate Days Sales of Inventory, Days Sales Outstanding, Days Payables
Outstanding and Cash Conversion Cycle for the industry.

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 Days Sales of Inventory, Days Sales Outstanding, Days Payables Outstanding and Cash Conversion Cycle for the industry:

DSI DSO DPO CCC

QI95 32 53 45 40
Q295 35 49 44 40
Q395 35 50 46 39 COGS of 1997 6344
Q495 32 47 44 35
Q196 34 47 42 39 Quarterly COGS of 1997 1586
Q296 36 50 43 43 net nventorty 215
Q396 37 49 43 43 sales 7944
Q496 31 42 33 40 Quarterly SALES of 1997 1986
Q497 12 16 40 -4
Difference -19 -26 7 -38 NET ACCOUNT RECEIVABLES 363
Account payables 699

As per the calculations, working capital grew more than 52% which is the growth of sales.
Considering of this 52% growth in sales, working capital in 1996 should have been $356
million, As compared to the current working capital level of 427 reflecting that working
capital may be reduced by 71 million this means that dell is lacking in terms of proper
utilization of its assets.

As an alternative rather than decreasing investment in working capital dell can also increase
their profit margin. More than required investment in working capital resulted in an outflow
of 71 million. However, by an increase of after tax profit of by 71 million its effect would
then be nullified. In summary dell can either reduce their working capital by 71 million or
increase profit margin by the same amount.

1996 1995 1994 1993 1992

Net profit 272 149 -36 102 51
sales 5296 3475 2873 2014 890
profit margin 5.10% 4.30% 1.25% 5.06% 5.73%

From this table, we can see that in 1992 profit margin was 5.73% which drastically decrease
in 1994 with a margin of 1.25%. and then it again had a growing profit margin.

Steps company should take:

• Dell could fund the growth with short term investments and their net profit (retained
earnings) if the cost of increasing long term debt is too high.
• Another option could be for Dell to either sell its fixed assets or reduce inventory and
account receivables and increase payables.
• Dell could also adjust its payment terms with its debtors and creditors in order to
achieve a negative cash conversion cycle (CCC). They could demand immediate
payment from their customers, thus reducing the DSO. With their size and influence,
they could demand increased payment terms from their suppliers, thus increasing their
DPO. The combined effect of this leads to a negative CCC and the ability to increase
the company growth.

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 Question (5): How would your answer to question number 3
change if Dell also repurchase $500 million of common stock in
1997 and repaid its long-term debt?

In case of repurchase of stocks and repayment of debt, the investment requirement would
shoot up by $613mn to become $1392 million. The already available funds are: Short term
investment of $591mn. The profit margin can be increased by 2% to yield an additional
$148mn in funds. The shortfall left of is 653 million.
These funds can be obtained by modifying the cash conversion cycle.
Inventory Days reduced by 8 days gives the savings of: 8 * 6344 (COGS) / 365 = $139mn.
Accounts Receivable Days reduced by 8 days gives the savings of: 8 * 7944 (Sales) / 365 =
$174mn.
Accounts Payable Days increased by 10 days gives A/R days at 47 (= 37 + 10) days. The
savings can be calculated as: 10 * 6344 (COGS) / 365 = $173mn. These all adds up to be
$486 mn.
The rest of $167 mn funds can be collected through increase in current liabilities.

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