Dell's Working Capital

Topics: Corporate finance, Finance, Working capital Pages: 3 (874 words) Published: March 28, 2013
(Q1) Dell’s advantageous working capital policy enabled the corporation to face its current growth. The Just-In-Time inventory system and Sales built to order allowed, reduced the cash conversion cycle and minimized the amount of capital Dell needed to finance its business. Compared to competitors, Dell working capital policy gave Dell the following advantages: * Lowest cost of inventory held - Dell saves 16.5 mUSD compared to Apple, 30.8 mUSD compared to Compaq and 12 mUSD compared to IBM. * No outdated goods on the market-product assembly after customer order received * Efficient Quality control - defective materials used for final product could be identified at earlier stages of production cycle vs. competitors having to disassemble whole product * High inventory turnover - continual decline in Days Sales of Inventory from 1994 to 1996 contributing to a low cash conversion cycle allowing more money available in liquidity (cash) format, than being tied up in inventory management * No middle man - selling directly to consumers and placing factory sites close to suppliers avoids unnecessary mark-ups which Dell transfers into customer savings and post-sale supports * Faster collection period and Just-in-Time delivery-production cycle helped ensure nothing was made until order and payment was processed first *

(Q2) Dell funded its growth in FY 1996 both by internal (income from operations) and external funding. It is shown that Dell’s internal funding had a FY 1996 Net Income of 266 mUSD. When calculating Dell’s FY 1996 Free Cash Flow before financing activities (FCF) it can be determined that Dell needed 96 mUSD in external funding. It funded this by increasing other liabilities and common stock. During FY 1996 Dell also decreased preferred stock and replaced it with common stock. This seems like a wise action as it gave Dell more decision power over the payment of dividends (and no obligations from preferred stocks) in a time where it...
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