Dell’s Working Capital

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 11 (2559 words) Published: December 7, 2008
Dell’s Working Capital

by Ali I

Executive Summary

I.In order to sustain and improve Dell’s performance and increased growth which will eventually lead to increase the market share, and to take advantage of the booming computer industry, Dell needs to come up with a plan to finance the future growth.

II.Dell Computer Corporation, founded in 1984, designed, manufactured, sold, and serviced high performance personal computers (PC’s). Its core strategy, and advantage over competitors, was selling directly to customers. In 1996, Dell reported an impressive growth in sales of 52%.

III.We forecasted, using the percent of sales method, for the next three years financial statements and we have done two analyses. First by increasing sales 20% and the other we increased sales by 50%. The financial ratios of our pro forma were also calculated. All these information were used to figure out the Additional Fund Needed (AFN). Our final results came with negative AFN which means that the company doesn’t need external financing.

IV.As we have seen in our analysis, Dell has it all worked out. By using its inventory system accurately, the company has more than enough resources to finance its growth internally and without any need for external financing. Moreover the company, using its internal funds, can payout its long term debt and increase its dividend policy without affecting its growth and future expansion potentials.

Dell Computer Corporation

Company Background

Dell Computer Corporation was founded by Michael Dell in 1984. The company designed, manufactured, sold, and serviced high performance personal computers (PC’s). It succeeded when it began to market and sell its own brand personal computer by taking orders over a toll free telephone line, and shipping directly to customers, which was Dell’s core strategy. This, combined with the Build-to-order model gave Dell the upper hand over its competitors.

Dell’s build-to-order manufacturing process yielded low finished goods inventory balances. By the mid 1990s Dell’s work-in-process (WIP) and finished goods inventory as a percent of total inventory ranged from 10% to 20%. This contrasted sharply with the industry leaders, such as Compaq, Apple, and IBM, who’s WIP and finished goods inventory typically ranged from 50% to 70% of total inventory, not including inventory held by their resellers.

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 PCs through CompUSA. Over the next two and a half years, Dell expanded this indirect distribution channel and continued aggressive pursuit of foreign markets. Annual sales increased by 268% within two years, compared to industry growth of 5%, and moved Dell into the top five in worldwide market share.

Dell then shifted its focus from exclusively growth to liquidity, profitability, and growth. For its 1996 fiscal year, ended January 31, 1996, Dell reported revenue of $5.3 billion with net income of $272 million, or 5.1% of sales. Revenue was up 52% over the prior year compared with an industry increase of 31%. Michael Dell predicted the company’s growth rate for the next year would again outpace the industry’s growth.

Company Challenges

With the booming industry and aggressive competition and in order to withhold and improve its current growth rates, Dell must consider and study the market very well. Dell needs to invest in managing its financial status and forecast the needs for the future.

In order for Dell to maintain its position and take it further it should conceder sources for financing the upcoming growth either internally or externally.

Company Analysis

First, we study the current situation of Dell Company.
Dell overcame competition and had rapid growth due to its inventory management model and the high liquidity that comes from it. It has...
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