Dell's Working Capital

1108 Words5 Pages
3/27/13

Dell Working Capital

1. How was Dell’s working capital policy a competitive advantage? Dell’s core strategy in the 90’s, build to order business model, allowed the firm to work with minimum finished goods and work-in-process (WIP) inventory. As a result, Dell maintained low inventory costs and permitted the company to adjust to technological innovations in the market. Dell’s WIP and finished goods inventory as a percent of total inventory was about 10%-20%, compared to the industry rate of 50%-70%. This led the company have low accounts payable, low cash conversion cycle, and high inventory turnover (Dell DSI 32 days vs. 58 days). As Dell’s computers were assembled after the company received the sale order and, as the rate of
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The actual requirement for Dell to sustain its growth target is $90+$108 = $198Mn. The remaining cash is incremental additional cash which is earned through operations, which can be invested as an asset (liquid investments). 4. How would your answers to Question 3 change if Dell also repurchased $500 Mn of common stock in 1997 and repaid its long term debt? The total amount of repurchase $500Mn and long term debt $113Mn is equal to $663Mn, which affects the net cash flow from financing activities. Total funding requirement is $663Mn + $90Mn (PPE) + $108Mn (WC) = $861Mn. Earnings from 1997, is $401Mn. We require an additional $460Mn ($861-$401) to fund www.termpaperwarehouse.com/print/Dell-Working-Capital/74941 2/3

3/27/13

Dell Working Capital

repurchase and repay long term debt. Increasing revenues means increasing sales price (consumer price). This option might not be viable because increase in price will decrease number of units sold. We don’t know the relationship between quantity demanded and price. However, every 1% increase in sales increases gross profit by $80Mn. In addition, operating expense will also increase due to increase

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