Enzone

Topics: Inventory, Asset, Balance sheet Pages: 11 (3098 words) Published: August 24, 2013
Dell’s Working Capital
Case 3 BA 280.1

February 28, 2013

EXECUTIVE SUMMARY

This case looks into how Dell Computer Corporation was able to turn around itself from a loss through a shift in company focus and effective working capital management.  During its early years, Dell was so focused on growth, that it neglected two other major financial considerations essential for a company’s growth: profitability and liquidity.

This paper describes the strategies undertaken by Dell to be able to recover from the loss, and in the process, attempts to answer the following questions:

1. What working capital management strategies were employed by Dell? 2. How did these strategies work to Dell’s advantage in order to achieve recovery? 3. How can Dell achieve growth sales while being profitable? 4. What financial plan should Dell implement in order to finance its future growth?

To address these, the group used a framework that leads to better understanding working capital management, its components (i.e. accounts receivable, inventory and accounts payable) and its implications to a business.

The balance sheet and income statement of Dell proved that the company indeed has a positive working capital and good financial ratios. The timing of Dell’s strategy to shift to a different business model and focus not only on growth but also on liquidity and profitability as well is perfect. They were able to gain bigger market share and improve the company’s standing in the market.

To sustain its growth, it is recommended that Dell stick with its direct-sell strategy as it has been proven to be one of their business advantages. In addition to these, Dell must be able to internally fund its financing need from the expected growth. Several recommendations on generating funds have been outlined which Dell could take into consideration.

DELL COMPUTER CORPORATION

Case Context

Dell Computer Corporation, one of the world’s top computer brands, approached the market in 1984 with a build-to-order business model – a business model that enabled the company to compete head-on with the big players in the computer industry. Six years after its inception, Dell went in an attempt to capture more sales and spur growth when it decided to break from its direct business model and employ mass market retailers as indirect distribution channels. This move by Dell brought tremendous revenue growth and placed the company as one of the top 5 computer companies in terms of market share.

However, focus on revenue growth alone proved to be not enough. In Dell’s case, an effective management of working capital could have spared the company from incurring a $76 million loss in 1993, which were mainly caused by the pullout of the company’s notebook line, charges relating the sell-off of excess inventory and restructuring charges to consolidate European operations. This realization pushed the company to focus on liquidity and profitability as well, together with growth. Changes geared towards this shift in focus have been instituted in the company, which eventually led to Dell’s recovery, in time for its re-entry to the notebook market and introduction of Pentium-based computer systems.

Problem Definition

The goal of this case study is to analyze how Dell’s shift in focus – from being focused solely on growth to being concerned also on liquidity and profitability alongside with growth – led to the recovery of the company from the loss it incurred. Specifically, this case aims to answer the following questions:

1. What working capital management strategies were employed by Dell? 2. How did these strategies work to Dell’s advantage in order to achieve recovery? 3. How can Dell achieve growth sales while being profitable? 4. What financial plan should Dell implement in order to finance its future growth?

Case Framework

With the objective of understanding the success brought about by...
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