Working Capital

ANTHONY 291 17 005

SOFIA PUJIASTI 291 17 053
AFRISKA YUNI ANGGRAINI 291 17 238 SYNDICATE 10
ARFAN NUR AKBAR 291 17 246
 Background
► Dell Computer Corporation manufactures, sells, and services
personal computers.
► The company markets directly to its customers. This build-to-order
model enables Dell to have much smaller investment in working
capital than its competitors.
► It also enables Dell to enjoy more fully the benefits of reductions in
component prices and to introduce new products more rapidly.
► Dell has grown quickly and has been able to finance that growth
internally by its efficient use of working capital and its profitability.
Dell’s Growth vs Industry
Calendar Year Dell Industry
1991 63% -2%
1992 126% 7%
1993 43% 15%
1994 21% 37%
1995 52% 31%
Days Supply of Inventory (DSI)
1993 1994 1995
Dell Computer 55 33 32
Apple Computer 52 85 54
Compaq Computer 72 60 73
IBM 64 57 48
 Days Supply of Inventory (DSI)
DSI in 1995 :
Dell - 32
Compaq – 73

Through Exhibit 4, we obtain COGS of Dell in 1995 = $2,737,000,000

Quarterly COGS = $684,250,000
From COGS above we can obtain the inventory of Dell in 1995
𝐷𝑆𝐼 ∗ 𝐶𝑂𝐺𝑆 32 ∗ 684,250,000
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = = = $243𝑀
90 90
 Working Capital and Cash to
Cash Cycle Q193
DSI DSO DPO
40 54 46
CCC
48
Q293 44 51 55 40
Q393 47 52 51 48
DSI (Days Sales of Inventory) Q493 55 54 53 56
= Net Inventory / (Q COGS/90) Q194 55 58 56 57
Q294 41 53 43 51
DSO (Days Sales Outstanding) Q394 33 53 45 41
= Net Acc. Receivables / (Q Sales/90) Q494 33 50 42 41
Q195 32 53 45 40
DPO (Days Payable Outstanding) Q295 35 49 44 40
= Accounts Payable / (Q COGS/90) Q395 35 50 46 39
Q495 32 47 44 35
CCC (Cash Conversion Cycle) Q196 34 47 42 39
= DSI + DSO - DPO Q296 36 50 43 43
Q396 37 49 43 43
Q496 31 42 33 40
Dell’s Days Supply of Inventory
• Dell’s low inventory levels resulted in fewer obsolete components in
inventory when technology changed.
• Others with high levels of inventory, such as Compaq, had to market
both new and older systems.
• Older systems were discounted, taking away sales from newer,
higher-margin systems.
• Cannibalization was not a significant issue for Dell because of its low
inventory and build-to-order model. Dell was able to grow sales by
offering faster systems at prices of competitor’s slower machines.
Risks Involved in DELL’s
• Dell’s build-to-order model and resulting low inventory had some risks.

• Component shortages were a disadvantage of Dell’s aggressive

inventory model! Dell had order backlogs because of part shortages.

• While revenue may have been lost due to cancelled or delayed orders
until supplies were available, the rapid technological change made the
advantages of Dell’s approach outweigh the disadvantages.
• In 1995 total assets were 46% of sales (1,594/3,475). Short-term
investments were 14% of sales.
• If we assume the short-term investments were not required to support
operations, Dell would have required 32% of increased sales in additional
operating assets.
• Sales in 1996  $5,296m  an increase of $1,821m or 52% from 3,475m
in 1995.
• So if Dell required an increase in operating assets as much as 32% of the
increase in sales:
• $1.8bn x 0.32  $582m additional investment in operational assets
would be necessary!
If 1995 profit margins of 4.3% had held Dell would have realized
$5,296 x 0.043 = $227 million
in net income; the additional funding requirement would be:
$582 - $227 = $335 million
Note that this funding requirement assumes that liabilities remain
constant
If we allowed liabilities change proportionally, Dell would have an excess
funding of $139m.
Fiscal Year 1996 1995 1994 1993
Sales $ 5,296.00 $ 3,475.00 $ 2,873.00 $ 2,014.00
Cost of Sales $ 4,229 $ 2,737 $ 2,440 $ 1,565
Gross Margin $ 1,067 $ 738 $ 433 $ 449
Operating Expenses $ 690 $ 489 $ 472 $ 310
Operating Income $ 377 $ 249 $ (39) $ 139
Financing & Other Income $ 6 $ (36) $ - $ 4
Income Taxes $ 111 $ 64 $ (3) $ 41
Net Prof it $ 272 $ 149 $ (36) $ 102
 28-Jan 29-Jan 30-Jan
1996 1995 1994
Current Assets :
Cash 55 43 3
Short Term Investments 591 484 334
Accounts Receiveables, net 726 538 411
Inventories 429 293 220
Other 156 112 80
Total Current Assets 1957 1470 1048
Property, Plant & Equipment, net 179 117 87
Other 12 7 5
Total Assets 2148 1594 1140

Current Liabilities:
Accounts Payable 466 403 0
Accrued and Other Liabilities 473 349 0
Total Current Liabilities 939 752 538
Long Term Debt 113 113 100
Other Liabilities 123 77 31
Total Liabilities 1175 942 669

Stockholders' Equity
Pref erred Stock 6 120 0
Common Stock 430 242 0
Retained Earnings 570 311 0
Other -33 -21 0
Total Stockholder's Equity 973 652 471
2148 1594 1140
 thanks!
Any questions?

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