Dell Computer

Working Capital Management

Financing Growth

 What is the Dells completive advantage?

How Dell funded 1996 sales growth?
Evaluate Dells Internal funding options for
50% sales growth in 1997

Dells Competitive Advantage

See Table A
Compare with Compaq
Use information from Table A and Exhibit 4
&5

 Competitive Advantage on DSI

Dells COGS(Compaqs DSI-Dells
DSI)/360 days

(($2,737)(73-32))/360 = $312 million

What does $312 mn mean to Dell?

 $312 mn is equal to (1996 figures)

59% of Dells Cash &ST Investments (Returns)
48% of Equity
209% of Income

Reduced Obsolesce Risk

Lower Inventory Cost

 Low inventory
Reduced obsolesce risk and lowers inventory cost
Level of Inventory
Dell
Compaq

8.9% of COS
20.3% of COS

Inventory price were down by 30% due to obsolesce

Dells inventory loss will be 2.7% while for Compaq 6.1% of
COG
$2.7 bn COS of Dell X (6.1 2.7 %)

Sell of older /obsolete system at discount will eat away

high margin new system sale
Or require the ready computers to be reconfigured
Low inventory has risk for Component shortage

Funding Growth for 1996

Total assets of Dell were 46% of Sales

Short term investment were 14% of Sales
Operating Assets were 32% of Sales
1996 sales increased by $1821 mn
How much additional investment in assets
would be required?

 Operating Asset increase would be

(46% -14%) * Incremental Sales
32% * 1.8 bn
$582 mn

Funding
At 1995 Net income margin of 4.3% the 1996 net income
would be $227 mn
1996 funding required would be $582-227 = 335 mn

But if WC efficiency improves outside funding

requirement may not be there .

SE 1

Forecasted 1996 Balance Sheet Based on Various Assumptions

1995 Actual
Forecast for 1996 with Actual 1996 Sales
Jan 29, '95 % of 95 sales
Fixed
Proportional
Liabilities
Liabilities

Net sales
Current Assets:
Cash
Short Term Investments
Accounts Receivables, net
Inventories
Other
Total Current Assets
P P & E, net
Other
Total Assets

Current Liabilities:
Accounts Payable
Accrued and other Liabilities
Total Current Liabilities
Long Term Debt
Other Liabilities
Total Liabilities
Shareholders' Equity:
Preferred Stock (Note a)
Common Stock (Note a)
Retained Earnings
Other
Total Stockholders' Equity

a
b
c

$3,475

$5,296

43
484
538
293
112
1,470
117
7
1,594

1%
14%
15%
8%
3%
42%
3%
0%
46%

403
349
752
113
77
942

12%
10%
22%
3%
2%
27%

66
484
820
447
171
1,987
178
11
2,176

Fixed

120
242
311
(21)
652
1,594

19%

66
484
820
447
171
1,987
178
11
2,176

% of sales
Assumed to be fixed
% of sales
% of sales
% of sales

614
532
1,146
172
117
1,436

%
%
%
%
%

% of sales
% of sales

Proportionate
403
349
752
113
77
942

879
1,821
Additional Funds Needed
355
1,594
46%
2,176
1,190,000 shares of preferred stock coverted to common stock in fiscal year 1996.
1995 Sales totalled $3,475 million.
1996 Sales were assumed to be $5,296 million.

879
2,315
(139)
2,176

of sales
of sales
of sales
of sales
of sales

Balancing figure

Sustainable Growth Rate

Dell Sustainable growth rate as seen in TN
is 31.6

SE 2

Sustainable Growth Calculaltions

NI(t)/S(t)
Panel A: Calculation using all assets
1995
4.3%

S(t)/A(t-1)

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

SGR

3.05

2.42

100%

31.60%

1996

5.1%

3.32

2.44

100%

41.70%

1997 Projected

5.1%

$3.70

2.21

100%

41.90%

1997 Actual

6.7%

$3.61

2.21

100%

53.20%

Panel B: Calculation excluding short-term investments

1995
4.3%
$4.31

$5.88

100%

108.80%

1996

5.1%

$4.77

$6.61

100%

161.90%

1997 Projected

5.1%

$5.10

$4.08

100%

106.80%

1997 Actual

6.7%

$4.98

$4.08

100%

135.60%

 Sustainable growth rate in 1995 was 31.6%, below

the actual growth rate of 52% in 1996.
Firm growing beyond sustainable growth rate would
either increase leverage or obtain additional equity.
Dell could finance its higher growth without
increasing leverage or obtaining equity
By improving w c mgmt efficiency. (TN 3)
Dell reduced its cash, receivable, inventory and
increased its current liabilities

Funding 50% growth in 1997

Forecast 1997 BS (TN 4)
Additional sales of $2648 mn imply
additional operating assets of $779 mn
At 1996 profit margin of 5.1%, 1997 profits
would be $405 mn.
AFN would be $315
Current liability levels may affect the AFN

 Efficient management of working capital

Improve margins
Reduce obsolesce cost
Can fund the growth w/o additional fund from outside

Combination of WCM efficiency and Profit

margin improvements can fund growth, repayment
of debt and buy back of shares
See actual BS in TN 8

Case Issues

Benefits of effective working capital management

Explore and understand wcm at Dell
Inventory policies of Dell and its competitors
Effective use of working capital as source of
internal funding for growth
Effective wc mgmt avoids substantial cost of
obsolesce
Working Capital Management in context of rapidly
growing, technologically changing industry