Dell Computer Company

DELLs Working Capital 1. How was dingles working superior policy a competitive advantage? dingle has achieved low working large(p) by guardianship its work-in-process and finished goods inventory very low. The competitive advantage dell achieves from this is that its inventory is significantly lower than its competitors, it does non require large warehouses for stocking the inventories and Dell is alike able to adapt the fastest to technology changes in the components. The competitors would call up it difficult to adapt to technology changes in a on the spur of the moment time because they have larger inventories than Dell does.In inadequate, Dell builds computers only when ordered and thus does not spend much capital as a result. The declining DSI means that Dell takes increasingly shorter days to make do its inventory. 2. How did Dell fund its 52% issue in 1996? Dell needed the following amount to fund its 52% harvest-home in 1996 (using bear witness 4&5) Operating s ummations (OA) = total assets short enclosure investment OA in 1995 = 1594 484 = 1110 sea mile USD Operating summation to Sales ratio = 1110/3457 = 32% Sales cast upd from 3457 to 5296 air mile USD in 1996. Multiplying the operating asset to gross gross revenue ratio by the subjoin in gross sales 0. 2 x (5296 3457) = 582 naut mi USD, which is the operating assets that Dell needed to fund its 52% growth. This make up in assets meant an development in liabilities too, proportional to the sales. The increase in liabilities would be Liabilities in 1995 = 942 Mil USD Liabilities to Sales ratio = 942/3475 = 27. 1% Increase in liabilities = 0. 271 x (5296 3475) = 494 geographical mile USD So, Dell would have an increase in operating assets of 582 mil USD and an increase in liabilities of 494 mil USD. The short investments would remain the same as it is not related to operations.Operational profit would increase with the Operating get ahead to Sales ratio ( top profit/sal es) x (5296 3457) = (149/3457) x (5296 3457) = 227 mil USD In all, we see that a sales increase of 52% has to be funded by 582 mil USD operating assets. The sales increase would also flirt additional 494 mil USD in liabilities, while generating 227 mil USD of operating profit, with short term investments remaining the same at 484 mil USD. As a result, any two combinations of liabilities, operational profit or short term investments would be sufficient to offset the 582 mil USD operating assets needed to sustain the 52% sales growth.In 1995, as shown earlier, the operating asset to sales ratio was 32%. Similarly, the ratio in 1996 was (2148 591)/5296 = 29. 4%. The difference in the percentages is 2. 54%. This decrease in operating assets in year 1996 suggests that operating cogency was improved by the same amount. Multiplying this difference in ratio by total sales in 1996 5296 x 0. 0254 = 134. 5 mil USD, this amount can be minify from the originally forecasted 582 mil USD to appoint the actual additional operating asset required to fund the 52% growth 582 134. 5 = 447. 5 mil USD. The net mete in 1995, as shown earlier was 4. % (149/3457). In 1996 it increase to 272/5296 = 5. 14%. This net profit is an increase from the forecasted 227 mil USD ( counting shown earlier), and can be attributed to improved net margins. Also, we see an increase in current liabilities of 187 mil USD between 1995 and 1996. We also see that the sum of the increase in current indebtedness and the net profit, of 1996, is higher than the actual additional operating asset requirement 272 + 187 = 459 mil USD 447. 5 mil USD. Therefore, Dell funded its 1996 sales growth through internal resources, i. e. reducing its current assets and increasing its net margin. . anticipate Dell sales will grow 50% in 1997, how might the company fund this growth internally? How much would working capital need to be trim back and/or profit margin increased? What steps do you recommend the company t ake? For the year 1996, Operating Assets = Total Assets miserable term Investments = 2148 591 = 1557 Mil USD When the sales increases by 50% in 1997, operating assets are also anticipate to increase by 50%. So for 1997, Dell requires an operating asset of 1557 x 1. 5 = 2336 Mil USD. We should also assume that the net profit as a percentage of sales will increase proportionally by 50% for 1997.For 1996, Net profit as a percentage of sales = 272/5296 = 5. 14% For 1997, Net profit = 5296 x 0. 0514 * 1. 5 = 408 Mil USD For 1997, additional operating asset required = 2336 1557 = 779 Mil USD How could this be funded by Dell? Let us assume two scenarios Scenario 1 Let us assume the liabilities remain the same for the year 1997 even when sales increases by 50%, i. e. DELL would not go for any additional liability to fund the increase in operating asset and it would resolve to do it internally. As per the calculation shown in the attached exhibit, Dell would need 371 Mil USD to fund th e increase in sales.The following are the ways DELL could fund this increase in operating asset 1. They could liquidate the short term investments of 591 Mil USD which would cover all of the additional funds required. 2. Dell could sell some of its fixed assets 3. They could reduce inventories, account receivables, and increase the account payables. They could bring down the working capital substantially by having a very low cash in cycle. They could negotiate with their suppliers for a higher DPO. With the honorable In Time (JIT) concept, they could receive payments immediately from their customers. Let us assume in 1997 Q4 1996 Q4 1997 Difference DSI 31 20 -11 DSO 42 25 -17 DPO 33 50 17 CCC 40 -5 -35 So, there is a high possibility to attain a negative cash cycle which in turn saves on the working capital. Average daily sales in 1997 = 7944/365 = 21. 8 Mil USD Cost of sales in 1997 = (4229/5296) x 7944 = 6343. 5 Mil USD Average daily cost of sales in 1997 = 6343. 5/365 = 1 7. 4 Mil USD For the year 1997, savings due to improved cash cycle isSavings due to reduced inventory days = 11 x 17. 4 = 191. 4 Mil USD Savings due to reduced receivable days = 17 x 21. 8 = 370. 6 Mil USD Savings due to increased payable days = 17 x 17. 4 = 295. 8 Mil USD Total saving from cash cycle improvements = 857. 8 Mil USD Scenario 2 Let us assume liabilities for 1997 increase proportionally (50%) with the increase in sales, i. e. Dell would look for external funding for the increase in operating asset. As per the calculation shown in the attached exhibit, Dell would have enough money to fund the increase in sales with the corresponding increase in liabilities.In fact they will have an excess of 161 Mil USD take for granted the long term debt remains unchanged. Dell could use this excess money to repay the long term debt or it could buy back some common stocks. 4. How would your answers to Question 3 change if Dell also repurchased $500 mil USD of common stock in 1997 and r epaid its long-term debt? Let us assume Dell repurchased 500 Mil USD of common stock in 1997 and it also repaid its long term debt. In such a scenario, as per the calculation shown in the attached exhibit, Dell would need 452 Mil USD to fund the increase in sales. The points discussed in scenario 1 of Q3 holds good here as well.