Dell's Working Capital

Group Assignment #2

Dell’s Working Capital

Statement of problem

Dell Computers founded in 1984, designed, manufactured, sold and serviced high performance personal computers (PCs). With a market industry growth of 31% Dell was able to achieve an outstanding 52% growth in the year 1996 from the previous year with a $5.3 B in revenue. With the anticipated PCs industry market to grow at 20% for the next 3 years, Dell’s management team needs to plan for Dells future growth. The main issues to consider are: 1- How should Dell finance their need for working capital in order to grow 50% in 1997; 2- How important is it to Dell to keep their short term investments; 3- Should Dell continue to grow at the same pace in 1997.

Facts/assumption

Dell’s core strategy is BTO model (Build To Order) where they sell directly to customers as per their order. This gives Dell the competitive advantage where their WIP & finished goods inventory as a percentage of total inventory is much less than competitors at 10-20% where competitors are at 50-70% of total inventory. This also allowed Dell to move quickly to the premium microprocessor chip with Intel which made them the first in the industry to achieve volume production of systems. Dell is also planning to go back to the direct sales model and as a result of which we expect the receivables to go down.

Analysis

From 1995 to 1996, the ratio of assets to sales went down from 0.42 to 0.37 and the ratio of liabilities to sales went down from 0.22 to 0.18. (Exhibit 1) This indicates that Dell has financed the 1996 growth primarily through operational efficiencies in its current assets and liabilities. In order to maintain its desired level of growth, Dell will need to ensure that it maintains or improves the working capital operations.

Further, from the analysis of pro forma of BS for 1997 suggests that the operations of Dell are creating sufficient liquidity to finance itself. To finance 50% growth we estimate...