DELL’S WORKING CAPITAL

GROUP -8

PRESENTED BY:
 PRESENTED TO:
Abhishek Jha BM-018010
 Dr. Pankaj K. Agarwal Abhishek Singh BM-018012
Aayush Verma BM-018004
Alpana Tyagi BM-018030
Anamika Dutta BM-018038
Anurag Bajpai BM-018050
 FM-2

DELL WORKING CAPITAL

INTRODUCTION
 Dell Computers Corporation was founded in 1984 by Michael Dell.
 Initially, the company purchased IBM compatible personal computers, upgraded them, then
sold the upgraded PCs directly to businesses by mail order. And Dell began its own brand
PC , taking orders over a toll free number and shipping directly to customer.
 Selling directly to customer was the Dell’s core strategy. This build to order model enables
Dell to deliver a customized order within few days, something its competitors could not do.
 Dell was the first company to provide toll free number and on-site technical support to
customer.
 In August 1993, Dell reported a $76 million dollar loss because of the introduction Dell
notebook, its first loss.
 Over the next two and half years, Dell expanded the indirect distribution channel and
marketing its Precision line exclusively through Price Club. Annual sale increased by 268%
within two years , compared to industry growth of 5% and moved Dell into the top five in
worldwide market share.
WHAT DID DELL DO AFTER LOSS
 In 1994 dell changes its structure
 Reemphasis on customer

 Low finished goods

 Pentium Technology

 Faster system at same price

 Reducing no. of suppliers

Q) How was Dell’s working capital policy a competitive advantage?

1 Low inventory holding

2 Reduced obsolescence risk and inventory cost

3 Constant working capital ratio

 Low Inventory Holding

Inventory Period = Net ending inventory

COGS / No. of days

Value of COGS of Dell in 1995 = $ 2737 mil (value obtained from exhibit 4)
Therefore, additional inventory of Dell in 1995,
= 32 * (2737/360) = $ 243 mil

Suppose, Inventory period of Dell was 73 as of its competitor Compaq, then additional inventory of Dell
in 1995 would be,
= 73 * (2737/360) = $ 554 mil

Thus, working capital policy of Dell could save around $ 312 mil of capital.
 Obsolescence risk and Inventory cost reduced

New technologies are introduced every year, so component cost could be reduced almost by 30%.

Because Compaq had to sell off its old inventory before purchasing new goods, so Opportunity Loss of
Compaq = 0.3 * 312 = $ 93.6 mil

As a % of COGS DELL COMPAQ

Inventory 8.9 20.3
Inventory Loss 2.7 6.1
 Constant Working Capital Ratio

Working Capital Ratio = Current Liabilities / Current Assets

(values taken from exhibit 5)

1993 1994 1995
= 1048/538 = 1470/752 = 1957/939
= 1.95 (approx.) = 1.95 (approx.) = 2.08 (approx.)

• Over the years, Dell was able to maintain their working capital ratio successfully.
• Improved ratio indicates improvement in collection procedures of Dell.
• Company has a reasonably fair amount of cash tied up in inventory and debtors. However, constant
ratio shows that Dell was able to manage their assets and run their business well.
 HOW DID DELL FUND ITS 52% GROWTH IN 1996?

1995 1996
Sales $3475 $5296
Increment in sale - 52.40%
Total Assets $1594
Short term investment $484
Operating Assets $1110 $1694
Which is 32% of sales. Similarly in year 1996 operating assets can be calculated- 32% of
$5296 = $1694
CONT…

Thus the operating asset must increase by – $1694-$1110 = $584

Arrangement of this assets
Sources of funds
 The liabilities less accounts payable have increased from 1995 to 1996 =
 = $ (2148-466) – (1594-403) M = $494 M
 Net Profit as a % of sales in 1995 = 149*100/3475 = 4.3%
 The projected operational profit = $5296 * 4.3% = $227 M
We can see that the cash inflow (721 M) is more than the required cash outflow so dell got
enough money to fund its growth internally in 1996.
50% SALES INCREASE IN 1997

(all values are in million dollars)

Year 1996
Total assets = 2148
Short term investments = 591
Operating assets= Total assets- Short term investments
: 2148-591 =1557
Sales = 5296
Operating assets as a % of sales = (1557/5296)*100 = 29.4%

1997 year
Sales of 1997 year = 5296 + 50% of 5296 = 7944
So operating assets required in 1997 year = 29.4% of 7944 = 2336
So funding required will be = 2336-1557 = 779

 Now for Sources of funds
 Liabilities except account payable for 1996 yr. = 2148-
466 = 1682
 Liabilities except account payable to sales in 1996 =
1682/5296 *100= 31.7%
 For 1997 year = 31.7% of 7944 = 2518
 The liabilities less accounts payable have increased
from 1996 to 1997
 :: 2518-1682 = 836
 Forecasted net profit to sales will be 5.1% of 7944 = 405

 So Total funds available = 836+405 = 1241

 RECOMMENDATION

Combination of working capital management efficiency and

profit margin improvements can lead to:

• Fund growth

• Help in repayment of debt

• Buy back of shares

• Fund growth with internal funds

 CONCLUSION
• In 1994 and 1995, Dell’s DSI was about half the level of its competitors. In January
1996, for example, Dell had inventory to cover 32 days of sales while Compaq Computer
had inventory to cover 73 days of sales.
• Using Dell’s cost of sales (COS) for 1995 contained in Exhibit 4 and the information on
DSI contained in Table A:Additional inventory at Compaq’s DSI = ( Dell’s COS)
(Compaq’s DSI – Dell’s DSI)/360 days = $312 million.This $312 million, in perspective,
represents 59% of Dell’s cash and short term investments, 48% of stockholder equity and
209% of its 1996 income.
• Dell’s low inventory levels resulted in fewer obsolete components in inventory when
technology changed, Others with high levels of inventory, such as Compaq, had to
market both new and older systems.
 CONT.

 Dell internally funded a 52% growth in sales, largely by increasing its asset
efficiency and profitability.

 Working Capital
Inventory fell dramatically during the year as Dell capitalized on rapid and significant
component price increases. Early in fiscal 1997, component prices dropped almost as
much as 10% per month, 20% in total for the second quarter! Dell benefited almost
immediately from price reductions while its competitor, burdened with higher levels
of over-priced parts, lagged by as much as six months.