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    Dell's Working Capital

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    Dell was able to fund its 50% sales growth in 1997 internally through working capital improvements and margin increases, even while repaying long-term debt and repurchasing $500 million in equity. Specifically, Dell reduced inventory, receivables, and improved payables, realizing $797 million in working capital savings. Additionally, Dell's profit margin increased from 5.1% to 6.6% through aggressive pricing and component cost decreases.

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    Dell's Working Capital

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    api-3719687
    16K views20 pages
    Dell was able to fund its 50% sales growth in 1997 internally through working capital improvements and margin increases, even while repaying long-term debt and repurchasing $500 million in equity. Specifically, Dell reduced inventory, receivables, and improved payables, realizing $797 million in working capital savings. Additionally, Dell's profit margin increased from 5.1% to 6.6% through aggressive pricing and component cost decreases.

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    Dell's Working Capital(1)

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    Dell was able to fund its 50% sales growth in 1997 internally through working capital improvements and margin increases, even while repaying long-term debt and repurchasing $500 million in equity. Specifically, Dell reduced inventory, receivables, and improved payables, realizing $797 million in working capital savings. Additionally, Dell's profit margin increased from 5.1% to 6.6% through aggressive pricing and component cost decreases.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    16K views20 pages

    Dell's Working Capital

    Uploaded by

    api-3719687
    Dell was able to fund its 50% sales growth in 1997 internally through working capital improvements and margin increases, even while repaying long-term debt and repurchasing $500 million in equity. Specifically, Dell reduced inventory, receivables, and improved payables, realizing $797 million in working capital savings. Additionally, Dell's profit margin increased from 5.1% to 6.6% through aggressive pricing and component cost decreases.

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    Download as ppt, pdf, or txt
    of 20

    Dell’s Working Capital

    B.B.Chakrabarti
    Professor of Finance
    IIM Calcutta
    The Questions

     Howwas Dell’s working capital policy


    a competitive advantage?

     Howdid Dell fund its 52% growth in


    1996?
    The Questions
     Assuming Dell sales will grow 50% in
    1997, how might the company fund this
    growth internally? How much would
    working capital need to be reduced and /
    or profit margin increased? What steps do
    you recommend the company take?

     How would your answer to the above


    question change if Dell also repurchased
    $500 million of common stock in 1997 and
    repaid the long-term debt?
    Dell’s Competitive
    Advantage
    1) Conservation of capital due to lower
    inventory holding
    Compaq Dell
    DSI in 95 73 32

    Cost of sales of Dell in 95 = $2737 mn.


    (Ex.4)

    Additional inventory at Compaq’s DSI =


    $2737 * (73-32) / 360 = $312 million
    Dell’s Competitive
    Advantage
    2) Reduced obsolescence risk and lower
    inventory cost
     Component cost can reduce by 30% a
    year as new technology is introduced.
     Inventory as % of COS – Dell (8.9%) and
    Compaq (20.3%)
     Inventory loss due to 30% reduction in
    price – Dell (2.7%) and Compaq (6.1% of
    COS)
     Comparative increase in profit in Dell in
    96 = $2.7 billion *(6.1%-2.7%) = $93
    million
    Dell’s Competitive
    Advantage
    3) Quicker adoption of new technology
     Dell’s low inventory levels resulted
    in fewer obsolete components as
    technology changed.
     While Compaq had to market both
    new and older systems due to high
    levels of inventory, Dell could offer
    new and faster systems quickly due
    to low inventory and build-to-order
    models.
    Funding 52% Growth in
    1996
    Facts to consider
     95- Total assets = 46% of sales
     95- ST investments = 14% of sales
     95- Operating assets = 32% of sales
     95- Net profit = 4.3% of sales
     96- Dell would require 32% of
    increased sales in operating assets
    i.e.
    $(5296-3475)*32% = $582 million.
    Funding 52% Growth in
    1996
    Facts to consider
     96- All assets excepting ST
    investments will grow at 52% over 95
    figures
     96- Assumed that the liabilities will
    also proportionally increase.
     96- Need additional $582 million
    assets
    Funding 52% Growth in
    1996
    Facts to consider
     96- Sources of funds:
    - Increase in liabilities = $494 million
    - Operational profit = $5296*4.3%
    = $ 227 million
    - ST investments = $484 million

     Enough available money for internal


    funding
    How Dell Funded 1996
    Growth?
    Facts
     Higher asset efficiency

    - Reduced cash, receivables,


    inventory and other current assets
    - Needed addl. $447 million of
    operating assets
    How Dell Funded 1996
    Growth?
    Facts
     Sources of funds

    - Increase in current liabilities = $187

    million
    - Net Profit = $272 million
    How Dell Performed in
    1996?
     Dell introduced Pentium technology.
     Unit sales grew by 48%.
     Average unit revenue grew by 3%.
     Gross margin declined by 1% due to
    aggressive pricing strategies and
    account mix shift.
     Net margin improved from 4.3% to
    5.1%
     Common stock was issued to
    Funding 50% Growth in
    1997
    Facts to consider
     96- Operating assets = 30% of sales
     96- Net profit = 5.1% of sales
     97- Dell would require 30% of
    increased sales in operating assets
    i.e.
    $(2336-1557) = $779 million.
    Funding 50% Growth in
    1997
    Facts to consider
     97- Increase in liabilities = $588
    million
     97- Net profit = 5.1% of $5296*1.5

    = $405 million
     ST investments = $591 million av.

     So, internally growth can be funded.


    97 with Repayment of LT Debt
    and Repurchase of $500 mn.
    Of Equity
     Funds needed = $984 million
     Sources of Funds:
    - 1% increase in margin = $79 million
    - ST investments = $591 million av.
    - Also, negative cash conversion cycle can
    do
    ( 97- Avg. daily sales = 96 sales*1.5/360
    = $22.1 mn. and Avg. daily COS =
    79.8% of sales as in 96 = $17.6 mn.
    i.e. 44 days of sales or 65 days of COS.
    96- CCC = 40 days)
    97- Actual Cash Conversion
    Cycle
    QTR.4 1996 Qtr.4 1997 Diff.

    DSI 31 13 -18
    DSO 42 37 -5
    DPO 33 54 +21
    CCC 40 -4 -44

    CCC = DSI + DSO -DPO


    Savings from WC
    Improvements
    Annual savings from:
    - Reduced inventory = 18*17.6 = $317
    mn.
    - Reduced Receivables = 5*22.1=$110
    mn.
    - Increased Payables =21* 17.6=$ 370
    mn.

    Total savings = $797 mn.


    Actual 1997
     Sales grew by 47%.
     CCC became – 44.
     Profit margin increased to 6.6% from
    5.1%.
     Component prices decreased.
    Advantage over competitors.
     Dell applied JIT philosophy.
    Actual 1997
     Operating assets increased by $199
    million only.
     Total liabilities increased by $733
    million even after repayment of LT
    debt.
     Dell obtained $279 million from put
    options.
     About $500 million equity
    repurchased.
     ST investments increased by $646
    Actual 1997

    Dell funded 1997 growth internally,


    repaid long-term debt and
    repurchased about $500 million in
    equity through a combination of
    working capital and margin
    improvements.

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