dell’s working capital management

8/3/2019 Dells Working Capital Management

1/12

Dells Working Capital

Management

Maximizing Sustainable

Growth


2/12

Dells Early Days

Dell began as a small PC company in themid-1980s

Dell began by buying IBM-compatibles,upgrading them, and selling them directly

Then Dell began making its own PCs

Build-to-order

After receipt of the order

Low finished-goods inventory


3/12

Dell Expanded, Then Was Harmed

In 1990, Dell began to sell throughCompUSA and then others

Dells market share leaped to the top 5 after a

268% increase in sales

2Q93, Dell reported a loss of $76MM

Excess inventory and bad notebooks

In 1994, Dell left the retail market The shift included a change in focus from

growth to growth, liquidity and profitability


4/12

1995: Shift to ROC and CFC

Suppliers reduced, inventory better managed

Dell upgraded to seasoned managers

Not rare for former entrepreneurial firms

Major shifts occurred Re-emphasis on direct contact w/ customers

Focus on Intel processor-based PCs

Began to be able to forecast demand and thus betterdeal with inventory needs Flawed Pentium no problem

Windows Updates no problem

ROC Return on Capital; CFC Cash Flow Cycle


5/12

Exhibit 2: Key WC Ratios

Exhibit 2 Working Capital Financial Ratios for Dell

Inv Daysa

A/R Daysb

A/P Daysc

CFCd

Q193 40 54 46 48

Q293 44 51 55 40

Q393 47 52 51 48

Q493 55 54 53 56

Q194 55 58 56 57Q294 41 53 43 51

Q394 33 53 45 41

Q494 33 50 42 41

Q195 32 53 45 40

Q295 35 49 44 40

Q395 35 50 46 39

Q495 32 47 44 35

Q196 34 47 42 39

Q296 36 50 43 43

Q396 37 49 43 43

Q496 31 42 33 40


6/12

Exhibits 4 and 5: Improvement

After a tough year in 1994

1995 and 1996 showed high growth,increased profitability

And Exhibit 2: Much lower WC requirements

Examine 1995 1996 Balance Sheets

Equity grew by $321MM, but liabilities grew

by less What does that say about sustainable

growth?


7/12

Sustainable Growth

Here are the sustainable growth figures

Panel A: Including All Assets

NI(t)/S(t) S(t)/A(t-1) A(t-1)/E(t-1) % Retained

Sustainable

Growth

1995 4.29% 3.05 2.42 100.00% 31.63%

1996 5.14% 3.32 2.44 100.00% 41.72%

But notice the asset called Short-TermInvestments.

Consider ignoring that one


8/12

Sustainable Growth: Fixed

Sustainable Growth Calculations - W/ and W/out Short-term Investments

Panel A: Including All Assets


Sustainable

Growth

1995 4.29% 3.05 2.42 100.00% 31.63%

1996 5.14% 3.32 2.44 100.00% 41.72%

Panel B: Excluding Short-term Investments


Sustainable

Growth

19954.29% 4.31 5.88 100.00% 108.76%

1996 5.14% 4.77 6.61 100.00% 161.90%

What this demonstrates is that once we recognize Dell's non-operational assets,

invested for income-earning, we see its stronger sustainable growth.


9/12

1997 Forecasts: Source of Funds?

The case author suggests a 1996 forecastbased on fixed liabilities versusproportional liabilities (see result)

He suggests doing the same for 1997

Also including or excluding share repurchases($500MM) and payoff of long-term debt

See results of the alternatives

Consider if added funding is needed


10/12

How Working Capital

Could Help Suppose these improvements were made:

Inventory days reduced by 17

A/R days reduced by 15

A/P Days increased b y 20

How much cash would that generate?


11/12

What Actually Occurred in 1997

Profits were way up

COGS% was reduced

Operating Expense% was reduced

A/R fell about 12%

Inventory Days fell about 40%

A/P Days rose sharply, more than 60% Shares were repurchased, LTD paid off

Put options (warrants) were issued


12/12

Dell: The Key Points

Dell addressed its working capitalmanagement extremely well

Its business strategies of direct sales andof supplier relations were crucial

It created a sustainable growth capacitythat resolves many problems raised by theearlier cases we studied

dell’s working capital management

Documents