DELL'S WORKING CAPITAL

Lahore school of economicsDELL'S WORKING CAPITALCase Analysis WACC

Muhammad HassanSharjeel ShahidBushra Javed Uzair Nasir Ch UsmanMahnoor Malik11/24/2014

The case highlights the importance of Working Capital Management in a rapidly growing firm like Dell.

The Case:ThecasehighlightstheimportanceofWorkingCapitalManagementinarapidly growing firm like Dell.The Company:Dell Computer Corp was founded in 1984 by Michael Dell. Companymanufactures sells andservices high performance personal computers compatible with industrial standards. Initially company purchased compatible personal computers and after upgrading them they sold these PC's directly to the customers by mail orders. But then company decided to began distributing its own brand PC's by taking direct orders through toll free telephone. They follow built-to-order model which enables dell to have a much smaller working capital requirement compared to its competitors. Selling directly to customers was Dell's core strategy and USP. This build to order model (Customization) allowed Dell to enjoy the benefits of reduction in component prices as well as it allowed the company to introduce new technology before its competitors. It also helped the company in reducing cost for keeping inventory. Dell kept a sizeable finished goods inventory in the stock or at their channel partners based on the forecast. The Issue(s):The issue isthat the management needed aplan forfinancing the future growth of the company. Till now, dell hadfinanced its growth internally.AnalysisDell Inventory ManagementIts major competitors including the industry leaders were Compaq, Apple and IBM. In 1990 while Dells competitors were keeping around 50% to 70% of finished goods out of total inventory. Dell was able to maintain 10% to 20%. This was because dell sourced the components from 80 suppliers who were close to Dell's Texas and Ireland plants and they delivered the parts to Dell on daily purpose. Small inventory balance means: Less expensive to shift to latest technologies (mainly by Microsoft, Pentium). Providing the latest system at the same price as competitors outdated PC's. Not keeping excess stock helps company to save room spaces and capital.

Particulars199619951994Particulars199619951994

Current Assets195714701048Net Income272149-36

Others15611280Shareholders Equity973652471

Inventories429293220ROE0.279547790.22853-0.0764

Current Liabilities939752538Sales529634752873

Net Working Capital1018718510CGS422927372440

Current Ratio2.084132061.954791.94796WC Turnover5.202357564.839835.63333

Quick Ratio1.461128861.416221.39033

Cash Conversion Cycle (Avg)41.2538.547.5

The above table shows calculated Net working capital (Current Assets - Current Liabilities) for year 1996, 1995 and 1994 simultaneously 1018, 718 and 510. And Net working capital turnover which will tell how well a company is utilizing its working capital to support its sales. (i.e) 5.2, 4.8 and 5.6. Return on equity which measures a firm's efficiency at generating profits from every unit of shareholders' equity (i.e) 0.2, 0.2 and -0.07.In 1996 Dell introduced Pentium Technology after which unit sales grew by 48%. Where as average unit revenue grew by 3%. During the whole year operating assets grew 30% of sales which we have proposed the same growth rate for the next year 1997 (Forcasted year). Net profits were 5.1% of sales. Cost of goods sold were 80% of sales.With 30% increase in growth rate for the year 1997. Sales grew to $6877m and net profit became $243m while gross margin was $1377m. So internal growth can be funded