Dells Working Capital

Dells Working Capital

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

The Questions
The Questions

Ho as Dells orking capital polic!

Ho as Dells orking capital polic!
a co"petiti#e a$#antage%
a co"petiti#e a$#antage%

Ho $i$ Dell fun$ its &'( groth in

Ho $i$ Dell fun$ its &'( groth in
)**+%
)**+%

The Questions
The Questions

,ssu"ing Dell sales ill gro &-( in

,ssu"ing Dell sales ill gro &-( in
)**./ ho "ight the co"pan! fun$ this
)**./ ho "ight the co"pan! fun$ this
groth internall!% Ho "uch oul$
groth internall!% Ho "uch oul$
orking capital nee$ to be re$uce$ an$ 0
orking capital nee$ to be re$uce$ an$ 0
or profit "argin increase$% What steps $o
or profit "argin increase$% What steps $o
!ou reco""en$ the co"pan! take%
!ou reco""en$ the co"pan! take%

Ho oul$ !our anser to the abo#e

Ho oul$ !our anser to the abo#e
1uestion change if Dell also repurchase$
1uestion change if Dell also repurchase$
2&-- "illion of co""on stock in )**. an$
2&-- "illion of co""on stock in )**. an$
repai$ the long3ter" $ebt%
repai$ the long3ter" $ebt%

Dells Co"petiti#e
Dells Co"petiti#e
,$#antage
,$#antage
)4
)4
Conser#ation of capital $ue to loer
Conser#ation of capital $ue to loer
in#entor! hol$ing
in#entor! hol$ing
Co"pa1
Co"pa1
Dell
Dell
D5I in *&
D5I in *&
.6
.6
6'
6'
Cost of sales of Dell in *& 7 2'.6. "n.
Cost of sales of Dell in *& 7 2'.6. "n.
89:.;4
89:.;4
,$$itional in#entor! at Co"pa1s D5I 7
,$$itional in#entor! at Co"pa1s D5I 7
2'.6. < 8.636'4 0 6+- 7 26)' "illion
2'.6. < 8.636'4 0 6+- 7 26)' "illion

Dells Co"petiti#e
Dells Co"petiti#e
,$#antage
,$#antage
'4
'4
=e$uce$ obsolescence risk an$ loer
=e$uce$ obsolescence risk an$ loer
in#entor! cost
in#entor! cost

Co"ponent cost can re$uce b! 6-( a

Co"ponent cost can re$uce b! 6-( a
!ear as ne technolog! is intro$uce$.
!ear as ne technolog! is intro$uce$.

In#entor! as ( of C>5 ? Dell 8@.*(4 an$

In#entor! as ( of C>5 ? Dell 8@.*(4 an$
Co"pa1 8'-.6(4
Co"pa1 8'-.6(4

In#entor! loss $ue to 6-( re$uction in

In#entor! loss $ue to 6-( re$uction in
price ? Dell 8'..(4 an$ Co"pa1 8+.)( of
price ? Dell 8'..(4 an$ Co"pa1 8+.)( of
C>54
C>54

Co"parati#e increase in profit in Dell in

Co"parati#e increase in profit in Dell in
*+ 7 2'.. billion <8+.)(3'..(4 7 2*6
*+ 7 2'.. billion <8+.)(3'..(4 7 2*6
"illion
"illion

Dells Co"petiti#e
Dells Co"petiti#e
,$#antage
,$#antage
64
64
Quicker a$option of ne technolog!
Quicker a$option of ne technolog!

Dells lo in#entor! le#els resulte$

Dells lo in#entor! le#els resulte$
in feer obsolete co"ponents as
in feer obsolete co"ponents as
technolog! change$.
technolog! change$.

While Co"pa1 ha$ to "arket both

While Co"pa1 ha$ to "arket both
ne an$ ol$er s!ste"s $ue to high
ne an$ ol$er s!ste"s $ue to high
le#els of in#entor!/ Dell coul$ offer
le#els of in#entor!/ Dell coul$ offer
ne an$ faster s!ste"s 1uickl! $ue
ne an$ faster s!ste"s 1uickl! $ue
to lo in#entor! an$ buil$3to3or$er
to lo in#entor! an$ buil$3to3or$er
"o$els.
"o$els.

Fun$ing &'( Aroth in
Fun$ing &'( Aroth in
)**+
)**+
Facts to consi$er
Facts to consi$er

*&3 Total assets 7 ;+( of sales

*&3 Total assets 7 ;+( of sales

*&3 5T in#est"ents 7 );( of sales

*&3 5T in#est"ents 7 );( of sales

*&3 >perating assets 7 6'( of sales

*&3 >perating assets 7 6'( of sales

*&3 Bet profit 7 ;.6( of sales

*&3 Bet profit 7 ;.6( of sales

*+3 Dell oul$ re1uire 6'( of

*+3 Dell oul$ re1uire 6'( of
increase$ sales in operating assets
increase$ sales in operating assets
i.e.
i.e.
28&'*+36;.&4<6'( 7 2&@' "illion.
28&'*+36;.&4<6'( 7 2&@' "illion.

Fun$ing &'( Aroth in
Fun$ing &'( Aroth in
)**+
)**+
Facts to consi$er
Facts to consi$er

*+3 ,ll assets e:cepting 5T

*+3 ,ll assets e:cepting 5T
in#est"ents ill gro at &'( o#er *&
in#est"ents ill gro at &'( o#er *&
figures
figures

*+3 ,ssu"e$ that the liabilities ill

*+3 ,ssu"e$ that the liabilities ill
also proportionall! increase.
also proportionall! increase.

*+3 Bee$ a$$itional 2&@' "illion

*+3 Bee$ a$$itional 2&@' "illion
assets
assets

Fun$ing &'( Aroth in
Fun$ing &'( Aroth in
)**+
)**+
Facts to consi$er
Facts to consi$er

*+3 5ources of fun$sC

*+3 5ources of fun$sC
3 Increase in liabilities 7 2;*; "illion
3 Increase in liabilities 7 2;*; "illion
3 >perational profit 7 2&'*+<;.6(
3 >perational profit 7 2&'*+<;.6(


7 2 ''. "illion
7 2 ''. "illion
3 5T in#est"ents 7 2;@; "illion
3 5T in#est"ents 7 2;@; "illion

9nough a#ailable "one! for internal

9nough a#ailable "one! for internal
fun$ing
fun$ing


Ho Dell Fun$e$ )**+
Ho Dell Fun$e$ )**+
Aroth%
Aroth%
Facts
Facts

Higher asset efficienc!

Higher asset efficienc!
3 =e$uce$ cash/ recei#ables/
3 =e$uce$ cash/ recei#ables/
in#entor! an$ other current assets
in#entor! an$ other current assets
3 Bee$e$ a$$l. 2;;. "illion of
3 Bee$e$ a$$l. 2;;. "illion of
operating assets
operating assets

Ho Dell Fun$e$ )**+
Ho Dell Fun$e$ )**+
Aroth%
Aroth%
Facts
Facts

5ources of fun$s
5ources of fun$s
3 Increase in current liabilities 7 2)@.
3 Increase in current liabilities 7 2)@.


"illion
"illion
3 Bet Profit 7 2'.' "illion
3 Bet Profit 7 2'.' "illion

Ho Dell Perfor"e$ in
Ho Dell Perfor"e$ in
)**+%
)**+%

Dell intro$uce$ Pentiu" technolog!.

Dell intro$uce$ Pentiu" technolog!.

Dnit sales gre b! ;@(.

Dnit sales gre b! ;@(.

,#erage unit re#enue gre b! 6(.

,#erage unit re#enue gre b! 6(.

Aross "argin $ecline$ b! )( $ue to

Aross "argin $ecline$ b! )( $ue to
aggressi#e pricing strategies an$
aggressi#e pricing strategies an$
account "i: shift.
account "i: shift.

Bet "argin i"pro#e$ fro" ;.6( to

Bet "argin i"pro#e$ fro" ;.6( to
&.)(
&.)(

Co""on stock as issue$ to

Co""on stock as issue$ to
e"plo!ees.
e"plo!ees.

Fun$ing &-( Aroth in
Fun$ing &-( Aroth in
)**.
)**.
Facts to consi$er
Facts to consi$er

*+3 >perating assets 7 6-( of sales

*+3 >perating assets 7 6-( of sales

*+3 Bet profit 7 &.)( of sales

*+3 Bet profit 7 &.)( of sales

*.3 Dell oul$ re1uire 6-( of

*.3 Dell oul$ re1uire 6-( of
increase$ sales in operating assets
increase$ sales in operating assets
i.e.
i.e.
28'66+3)&&.4 7 2..* "illion.
28'66+3)&&.4 7 2..* "illion.

Fun$ing &-( Aroth in
Fun$ing &-( Aroth in
)**.
)**.
Facts to consi$er
Facts to consi$er

*.3 Increase in liabilities 7 2&@@

*.3 Increase in liabilities 7 2&@@
"illion
"illion

*.3 Bet profit 7 &.)( of 2&'*+<).&

*.3 Bet profit 7 &.)( of 2&'*+<).&


7 2;-& "illion
7 2;-& "illion

5T in#est"ents 7 2&*) "illion a#.

5T in#est"ents 7 2&*) "illion a#.

5o/ internall! groth can be fun$e$.

5o/ internall! groth can be fun$e$.

*. ith =epa!"ent of ET Debt
*. ith =epa!"ent of ET Debt
an$ =epurchase of 2&-- "n.
an$ =epurchase of 2&-- "n.
>f 91uit!
>f 91uit!

Fun$s nee$e$ 7 2*@; "illion

Fun$s nee$e$ 7 2*@; "illion

5ources of Fun$sC
5ources of Fun$sC
3 )( increase in "argin 7 2.* "illion
3 )( increase in "argin 7 2.* "illion
3 5T in#est"ents 7 2&*) "illion a#.
3 5T in#est"ents 7 2&*) "illion a#.
3 ,lso/ negati#e cash con#ersion c!cle can
3 ,lso/ negati#e cash con#ersion c!cle can
$o
$o


8 *.3 ,#g. $ail! sales 7 *+ sales<).&06+-
8 *.3 ,#g. $ail! sales 7 *+ sales<).&06+-


7 2''.) "n. an$ ,#g. $ail! C>5 7
7 2''.) "n. an$ ,#g. $ail! C>5 7


.*.@( of sales as in *+ 7 2)..+ "n.
.*.@( of sales as in *+ 7 2)..+ "n.


i.e. ;; $a!s of sales or +& $a!s of C>5.
i.e. ;; $a!s of sales or +& $a!s of C>5.


*+3 CCC 7 ;- $a!s4
*+3 CCC 7 ;- $a!s4

*.3 ,ctual Cash Con#ersion
*.3 ,ctual Cash Con#ersion
C!cle
C!cle


QT=.; )**+
QT=.; )**+
Qtr.; )**.
Qtr.; )**.
Diff.
Diff.
D5I
D5I
6)
6)
)6
)6
3)@
3)@
D5>
D5>
;'
;'
6.
6.
3&
3&
DP>
DP>
66
66
&;
&;
F')
F')
CCC
CCC
;-
;-
3;
3;
3;;
3;;
CCC 7 D5I F D5> 3DP>
CCC 7 D5I F D5> 3DP>

5a#ings fro" WC
5a#ings fro" WC
I"pro#e"ents
I"pro#e"ents
,nnual sa#ings fro"C
,nnual sa#ings fro"C
3 =e$uce$ in#entor! 7 )@<)..+ 7 26).
3 =e$uce$ in#entor! 7 )@<)..+ 7 26).
"n.
"n.
3 =e$uce$ =ecei#ables 7 &<''.)72))-
3 =e$uce$ =ecei#ables 7 &<''.)72))-
"n.
"n.
3
Increase$ Pa!ables 7')< )..+72 6.-
Increase$ Pa!ables 7')< )..+72 6.-
"n.
"n.
Total sa#ings 7 2.*. "n.
Total sa#ings 7 2.*. "n.

,ctual )**.
,ctual )**.

5ales gre b! ;.(.

5ales gre b! ;.(.

CCC beca"e ? ;;.

CCC beca"e ? ;;.

Profit "argin increase$ to +.+( fro"

Profit "argin increase$ to +.+( fro"
&.)(.
&.)(.

Co"ponent prices $ecrease$.

Co"ponent prices $ecrease$.
,$#antage o#er co"petitors.
,$#antage o#er co"petitors.

Dell applie$ GIT philosoph!.

Dell applie$ GIT philosoph!.

,ctual )**.
,ctual )**.

>perating assets increase$ b! 2)**

>perating assets increase$ b! 2)**
"illion onl!.
"illion onl!.

Total liabilities increase$ b! 2.66

Total liabilities increase$ b! 2.66
"illion e#en after repa!"ent of ET
"illion e#en after repa!"ent of ET
$ebt.
$ebt.

Dell obtaine$ 2'.* "illion fro" put

Dell obtaine$ 2'.* "illion fro" put
options.
options.

,bout 2&-- "illion e1uit!

,bout 2&-- "illion e1uit!
repurchase$.
repurchase$.

5T in#est"ents increase$ b! 2+;+

5T in#est"ents increase$ b! 2+;+
"illion.
"illion.

,ctual )**.
,ctual )**.
Dell fun$e$ )**. groth internall!/
Dell fun$e$ )**. groth internall!/
repai$ long3ter" $ebt an$
repai$ long3ter" $ebt an$
repurchase$ about 2&-- "illion in
repurchase$ about 2&-- "illion in
e1uit! through a co"bination of
e1uit! through a co"bination of
orking capital an$ "argin
orking capital an$ "argin
i"pro#e"ents.
i"pro#e"ents.