Dell Working Capital Case Essay

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Dell working capital case
Dell’s build to order system created a very different balance sheet. We want to assess their competitive advantage in working capital at the time of the case, evaluate how they funded growth at the time (1996) and evaluate potential ways to fund projected sales growth of 50% in 1997 through use of internal funds. 1. Calculate their working capital advantage. To do this calculate days sales of inventory, payable days and receivables days to find their cash conversion cycle.

Days sales of inventory=365*(429+293)/(2*4229)=31.16
Payable days=365*(466+403)/(2*4229)=37.50
Receivables days=365*(726+538)/(2*5296)=43.56
Cash conversion cycle=31.16+43.56-37.50=37.22
The cash conversion cycle measures how
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If technological change reduced the value of inventory by 30%, Dell would incur an inventory loss of about 2.7% of COS and Compaq would incur a loss of 6.1 of COS. The lower inventory losses for Dell imply higher profits. At Dell’s 1996 COS of $2.7 billion, the effect of the component price reductions contributes about $93 million to profits ( $2.7 billion x 6.1% - 2.7%).
Yes. Dell have advantages in obsolescence .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 models. Dell was able to grow sales by offering faster systems at prices of competitor’s slower machines.

4. Evaluate their 1996 funding – look at asset efficiency rates for Dell. Assume operating assets grow based on percent of sales. How did they manage to fund 52% growth.?

Dell’s cash funding to achieve 52% growth in 1996 through internal means:
Its Total Assets except short term investment should grow in proportion.
Let’s define the assets mentioned above as operating assets.
OA1995=1594-484=1110, as a percentage of sales in 1995=1110/3475=31.94%.
To determine OA 1996’s contribution, OA ratio to sales should remain intact.
Required increase of

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