Case Study: Dell’s Working Capital

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Fiscal Year

1996

1995

Sales

5296

3475

Net Profits

272

149

Current Liabilities

932

752

1995 Total Assets = 1594 m and Short-Term Investments = 484 m

1996 Total Assets = 2148 m and Short-Term Investments = 591 m

From 1995 to 1996 Dell’s sale increased from 3475 m to 5296 m

Operating Assets in 1995 = (1594 – 484)/3475 = 31.9%

Operating Assets in 1996 = (2148 – 591)/5296 = 29.4%

There was a decrease in Operating Assets of 31.9% - 29.4% = 2.5%

Sales (5296 m - 3475 m) x 31.9 % = $582 m

The decrease in Operating Assets means 5295 x 2.5% = 134.5 m

$582 m is the required amount, $134.5 m is the amount they saved

The additional operating assert required to fund the 52% increase in sales: $582 m - $134.5 m = $447.5 m

Current Liabilities increased 939-$752 = $187 m (1995 to 1996)

$272+$187 = $459 m

Therefore

Net Profit of $459 m greater than $447.5 m. Dell was able to fund its 1996 sales growth through internal resources.

Assume a 50% percent growth rate for Dell’s revenue in 1997. Project its balance sheet.

Year

1996

Percentage

1997

Sales

5296

50%

7944

COGS

4229

50%

6344

Gross Margin

1067

OE

690

50%

1035

Operating Income

377

565

Other Income

6

0

Taxes

111

170

Net Income

272

395

Year

1996 ($ m)

1997 ($ m)

[projected]

Cash

55

55

Short Term Investments

591

591

Accounts Receivables

726

Inventories

429

Others

156

Current Assets:

1957

2645

Accounts Payable

466

835

Other Liability

473

473

Current Liabilities:

939

1308

Difference in operating asset: 2335.5- 1557= 778.5

The increased current liabilities are the resource of fund. From the liabilities, the increased net profit and the current short-term investments we can tell that Dell will be able to fund the growth as long as the short-term investments continue to grow.

How would debt repayment and a repurchased $500 million of common stock affect your recommendation?

Cash Requirement:

Debt repayment: 113

TA-STI=2148-592=1557

Percentage of sale in 1996= 1557/5296=29.4%

Required increased: 0.294 x 0.5 x 5296=778.51

Cash requirement: 500+113+778.51=1391.51

Net Profit margin: 272/5296=5.14%------increased to 6.6%

7944*6.6%=524.3

Shortfall= 1391.51-591-524.3=276.21

Improving cash conversion cycle[5]:

Reducing 8 inventory day: 8*(6344/365)=139

Reducing 7 A/R day: 7*(7944/365)=152.35

Reducing 7 A/P day: 7*(6344/365)=121.66

139+152.35+121.66=413

This result 413 millions is greater than 276.2. That is to say: with the improvement of the cash conversion cycle, Dell is sufficient to fund after paying debt and repurchase stock.

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