Dell Working Capital

Topics: Working capital, Asset, Balance sheet Pages: 2 (368 words) Published: March 5, 2013
Dell’s Working Capital
The Case:
Dell Computers Corporation has been growing faster than its competitors. It has revolutionized the PC industry by providing customized laptops & notebooks to its customers in a few days at competitive prices. It did so by building computers after it received customer’s orders. This enabled Dell to swiftly roll out new products, maintain lower inventory & respond quickly to market needs. It generated more cash due to low cash conversion cycle. Low inventory coupled with low capital costs gave Dell higher ROCE. Good inventory management also gave Dell access to working capital which helped it to finance its growth internally. The Company:

Dell was founded in 1984 by Michael Dell. Initially it sold upgraded IBM PCs as per customer requirements. Later, it started manufacturing its own brand of computers. It advertised in trade magazines and catalogs & took orders via its toll free telephone line. It differentiated itself from competition by offering helpline & on-site technical support. Currently, it has two manufacturing plants-Texas & Ireland. The Issue(s):

• Was Dell’s working capital policy a competitive advantage • How did Dell finance its 52 % growth in 1996
The Analysis:
Cost of Dell sales in 1995= $ 2737 MM
Cost of Dell sales per day in 1995=2727/360=$ 7.6 MM
Cost of excess inventory for Compaq = (73-32)*7.6= $ 311.6 MM Loss of benefit by clearing old inventory at discounted rates = 0.3 * 311.6 MM= $ 93.4 MM For funding 52 % growth through internal means, we assume that Total assets excluding short term investments (TAESI) grow in same proportion. TAESI1995=1594-484= $ 1110 MM

TAESI as % of sales= 1110*100/3475= 31.94 %
Therefore, required TAESI increase=0.3194*0.522*3475= $ 579.3 MM The target should be met without increase in account payables. Therefore, Total liabilities excluding account payables (TLEAP) change will give cash flow Δ TLEAP= TLEAP1996-TLEAP1995= (2148-466)-(1594-942) = $ 491 MM Net Income % of...
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