Dell 27s Working Capital Essay example

Dell’s Working Capital

Introduction Dell Computer Corporation (Dell) designed; manufactured, sold and serviced personal computers and other related digital devices. Dell emerged from purchasing personal computer division of IBM and soon expanded to sell its own brand to personal consumers and business clients. It sold computers through magazines, online distributors and it takes order on the phone as well. But unlike Apple or Sony, Dell does not have any retail stores. Dell was also the first in the industry to largely produce a new Pentium processor and hugely increased the portion of sales of computer run by the processor. In this paper, we will discuss the well performance of Dell comparing to its peers from the perspective of operating business model, which let Dell had a relatively short cash convention and operating cycle in the industry. As a result, Dell has grown very fast over the past few years and has expected the high growth to continue in the coming years. We will also focus on how did Dell finance the 52% growth in 1996 and will in 1997 assuming a 50% growth. The fiscal year of 1995-1996 had been dramatic boost for Dell in terms of sale growth, and Dell fund the growth both internally and externally. Our calculation and forecast for Dell in 1997 were based on a model called “percentage of sales approach”, assuming all items grow in proportion to sales, so that the sales to asset ratio will not change. In this approach we also assume the dividend payout ratio and tax rate remains consistent. Under these prerequisite we calculated that Dell needs to fund $453 million to meet the 50% growth in 1997 and we recommend debt financing if the capital structure will not hurt the company. We also took into account a possibility of Dell repurchasing $500 million of common stock and repaying its outstanding long-term debt in 1997. Considering the cost and the working capital situation that Dell is in, however, we do not recommend this decision because Dell may use too much cash or short term investment to cover the cost.

Dell’s competitive advantage

Dell only proceeds to manufacture when orders are received with pre-payment in full. That guarantees Dell possess the order’s delivery and it would never have to store them in inventory. In practice, Dell further enhanced its financial transparency in confirmed orders that it only order parts from suppliers after receiving orders. Ultimately, Dell is balancing its account payable with account receivables simultaneously. Suppliers locate fairly close to Dell’s plant where parts can be delivered on a daily basis. Dell also possesses an impressive low level inventory. Comparing to its peers, Dell had ranked lowest DSI (Days of Supply Inventory) in 1993, 1994, 1995. (Please see exhibit 1) Inventory has a significant impact on profitability. For instance, if Dell was operating at its competitor Compaq Computer’s DSI level on year of 1995, the inventory would be around $377 million rather than $293million which make an empirical difference that its net profit of 1995 would not be positive. Quantified demonstration on DSI: In exhibits, one can find the DSI of Dell’s and its peers’. For instance, choose year of 1994.
DSI peers= (57 + 85 + 60) / 3 = 67.3days
DSI dell=33
DSI = 365 * Average Inventory /cost of goods sold
Average Inventory=DSI*cost of goods sold/365 From Exhibit 2 in the article, the cost of goods sold for Dell in year of 1994 was $2440 million, average inventory for Dell was: $221million and its peers were at: $449.90 million using the same of cost of goods sold. The difference is huge: $228.9. Although it disregarded the difference of cost of goods sold, but the main picture is presented to tell how DSI could effect after all. To conclude, Dell operates at an efficient business model of “order-manufacture-deliver” that benefits Dell: 1) Low inventory cost and high inventory

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