Dell's Working Capital - Case Analysis - G05 4l3r5m

Dell’s Working Capital Strategy analysis Case Submission by: Tarun KSG Saurabh Thadani Srikanth Konduri Tushar Gupta Nikhil Gupta

Group: G05

(10DM-162) (10FN-102) (10FN-109) (10FN-115) (10FN-121)

1. Dell’s Working Capital policy 

Pros:  Low finished goods, low carrying cost, reinforces it custom build-to-order strategy  In case of defective products, it is much quicker time to market  Rolling out PCs with new OS, technology much faster than its competitors  Helps it to on savings on customers, when the component cost is reducing  Generates cash from maintaining Low Cash Conversion Cycle  More sales can be stimulated on credit basis  Low inventory with low fixed assets gives Dell a higher Return on Capital Employed

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Cons:  It has led to the component shortages in 1996  Larger dependence on the on-time high quality supplies from manufacturers  When product changes, process should start afresh by thrashing out existing ones

2. Assuming that the COGS per day remains same for the competitors of Dell: 

The carrying costs solely depends on the Days Sales of Inventory (DSI)  During 1995: Cost of Sales = $2737 mn  Cost of Sales per day = COS/365 = 2737/365 = $7.5 mn  DSI(Dell) = 32; DSI(Compaq) = 73  So, Inventory holding of Compaq over Dell is in excess of= (73-32)*7.5 = $307.5 mn

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Because Compaq has to sell off its old inventory before purchasing new goods:  Loss of benefits from purchase of low cost, (30% lower) new technology inventory  Compaq’s opportunity loss = 0.3*307.5 = $92.25 mn

3. Dell’s cash funding to achieve 52% growth in 1996 through internal means: 

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Its Total Assets except short term investments should grow in proportion  Let’s define the assets mentioned above as TAESTI  TAESTI1995=1594-484=$1110 mn; as percentage of sales in 1995=1110/3475=31.94%  To determine TAESTI1996‘s contribution, TAESTI ratio to sales in should remain intact  Required increase of TAESTI to meet 1996 growth=0.3194*0.522*3475=$579.37 mn

CF-2 Assignment

Dell’s Working Capital Strategy analysis 

Group: G05

It should be met without the of increase in payables:  Let’s define Cumulative liabilities without payables as TLEAP o Increase in TLEAP contributed to the cash flow o Cash flow from ∆TLEAP, TLEAP1996-TLEAP1995=(2148-466)-(1594-403)= $491 mn 

Net Profit1995 as a percentage of Sales in 1995 = 149/3475 = 4.29% o To determine Net Profit1996’s contribution, its ratio to Sales should remain intact o So, cash flow from Net Profit1996 =0.0429*1.522*3475= $226.89 mn

As cash inflow (491+226.89= $717.89 mn) is more than required cash outflow of $579.37 mn, it can be inferred that Dell got enough money to fund the growth in 1996 internally. 4. Dell’s ability to fund its growth of 50% in 1997 internally:      

TAESTI1996=2148-591=$1557 mn; as percentage of sales in 1996=1557/5296=29.4% Required increase of TAESTI to meet 1997 growth=0.294*0.5*5296=$778.51 mn TLEAP1996 as a percentage of Sales in 1996 = (2148-466)/5296 = 31.6% Cash flow from ∆TLEAP, TLEAP1997-TLEAP1996=2523-(2148-466)= $841 mn Net Profit1996 as a percentage of Sales in 1996 = 272/5296 = 5.14% So, cash flow from Ops Profit1997 =0.0514*1.5*5296= $408.32 mn

As cash inflow (841+408.32= $1249.32 mn) is more than required cash outflow of $778.51 mn, it can be inferred that the growth in 1997 can be funded internally. 5. Increased requirement of cash to buy-back the equity worth $500 mn, along with repayment of long-term debt of $113 mn, along with maintaining 50% growth: 

The overall cash requirement will be increased now by: 500+113+778.51 = $1391.51 mn  It will be met partly by Short Term Investments = $591 mn  By improving profit margin from 5.14% to 6.6%, increased contribution = $524.3 mn  So, the remaining cash flow to be met = 1391.51-591-524.3 = $276.21 mn

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By improving the Cash Conversion Cycle, cash inflow will improve and meets needs:  DSI=31 days, reducing it by 3 days saves carrying cost:3*1.5*4229/365=$52.15 mn  DSO=42 days, reducing it by 6 days reduces receivable: 6*1.5*5296/365=$130.6 mn  DPO=33days, increasing it by 6days improves payables:6*1.5*4229/365=$104.2 mn

So, the increased cash inflow out of operational improvements will be: 52.15+130.6+104.2=$286.95 mn; as Dell already faced problem with component shortages in 1996, it will not look into reducing its DSI by a large margin. As $286.95 mn obtained through operational process improvements coupled with short term investments of $591 mn and a net profit of $524.3 mn is suring the required cash flow of $1391.51 mn which, Dell will be able to fund its growth of 50% in 1997, after paying long-term debt of $113 mn & buying back equities worth $500 mn.

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CF-2 Assignment