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Dells Working Capital
Management
Maximizing Sustainable
Growth
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Dells Early Days
Dell began as a small PC company in themid-1980s
Dell began by buying IBM-compatibles,upgrading them, and selling them directly
Then Dell began making its own PCs
Build-to-order
After receipt of the order
Low finished-goods inventory
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Dell Expanded, Then Was Harmed
In 1990, Dell began to sell throughCompUSA and then others
Dells market share leaped to the top 5 after a
268% increase in sales
2Q93, Dell reported a loss of $76MM
Excess inventory and bad notebooks
In 1994, Dell left the retail market The shift included a change in focus from
growth to growth, liquidity and profitability
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1995: Shift to ROC and CFC
Suppliers reduced, inventory better managed
Dell upgraded to seasoned managers
Not rare for former entrepreneurial firms
Major shifts occurred Re-emphasis on direct contact w/ customers
Focus on Intel processor-based PCs
Began to be able to forecast demand and thus betterdeal with inventory needs Flawed Pentium no problem
Windows Updates no problem
ROC Return on Capital; CFC Cash Flow Cycle
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Exhibit 2: Key WC Ratios
Exhibit 2 Working Capital Financial Ratios for Dell
Inv Daysa
A/R Daysb
A/P Daysc
CFCd
Q193 40 54 46 48
Q293 44 51 55 40
Q393 47 52 51 48
Q493 55 54 53 56
Q194 55 58 56 57Q294 41 53 43 51
Q394 33 53 45 41
Q494 33 50 42 41
Q195 32 53 45 40
Q295 35 49 44 40
Q395 35 50 46 39
Q495 32 47 44 35
Q196 34 47 42 39
Q296 36 50 43 43
Q396 37 49 43 43
Q496 31 42 33 40
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Exhibits 4 and 5: Improvement
After a tough year in 1994
1995 and 1996 showed high growth,increased profitability
And Exhibit 2: Much lower WC requirements
Examine 1995 1996 Balance Sheets
Equity grew by $321MM, but liabilities grew
by less What does that say about sustainable
growth?
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Sustainable Growth
Here are the sustainable growth figures
Panel A: Including All Assets
NI(t)/S(t) S(t)/A(t-1) A(t-1)/E(t-1) % Retained
Sustainable
Growth
1995 4.29% 3.05 2.42 100.00% 31.63%
1996 5.14% 3.32 2.44 100.00% 41.72%
But notice the asset called Short-TermInvestments.
Consider ignoring that one
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Sustainable Growth: Fixed
Sustainable Growth Calculations - W/ and W/out Short-term Investments
Panel A: Including All Assets
NI(t)/S(t) S(t)/A(t-1) A(t-1)/E(t-1) % Retained
Sustainable
Growth
1995 4.29% 3.05 2.42 100.00% 31.63%
1996 5.14% 3.32 2.44 100.00% 41.72%
Panel B: Excluding Short-term Investments
NI(t)/S(t) S(t)/A(t-1) A(t-1)/E(t-1) % Retained
Sustainable
Growth
19954.29% 4.31 5.88 100.00% 108.76%
1996 5.14% 4.77 6.61 100.00% 161.90%
What this demonstrates is that once we recognize Dell's non-operational assets,
invested for income-earning, we see its stronger sustainable growth.
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1997 Forecasts: Source of Funds?
The case author suggests a 1996 forecastbased on fixed liabilities versusproportional liabilities (see result)
He suggests doing the same for 1997
Also including or excluding share repurchases($500MM) and payoff of long-term debt
See results of the alternatives
Consider if added funding is needed
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How Working Capital
Could Help Suppose these improvements were made:
Inventory days reduced by 17
A/R days reduced by 15
A/P Days increased b y 20
How much cash would that generate?
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What Actually Occurred in 1997
Profits were way up
COGS% was reduced
Operating Expense% was reduced
A/R fell about 12%
Inventory Days fell about 40%
A/P Days rose sharply, more than 60% Shares were repurchased, LTD paid off
Put options (warrants) were issued
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Dell: The Key Points
Dell addressed its working capitalmanagement extremely well
Its business strategies of direct sales andof supplier relations were crucial
It created a sustainable growth capacitythat resolves many problems raised by theearlier cases we studied
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