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
Cash conversion cycle=31.16+43.56-37.50=37.22
The cash conversion cycle measures how …show more content…
Comparing to the actual balance sheet, the increase in operating assets=1557-1110=447, the increase in spontaneous liabilities = 473-349=187, the increase in the equity = 272.
The assets and spontaneous liabilities increased less than the projected numbers while the equity increased much more than the projected number.
As cash inflow (491+226.89=717.89) is more than required cash outflow of 579.37, it can be inferred that DELL got enough money to fund the growth in 1996 internally. The profit margin improved from 4.3% to 5.1% in 1996, while the total assets turnover improved from 5.45% to 7.27%.
In summary, Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitability.
5. Assuming they want to grow 50% in 1997 how might they fund this growth internally? How much working capital do you need? What steps should they take? What happens to the profit margin?
In 1996, Operating assets= 30% of sales (1557/5296), profit margin=5.1%
So in 1997, Dell would require 30% of increased sales in operating assets. In 1997, Operating assets=(1557/5296)*1.5*5296=2336 so the increased operating assets=2336-1557=779
And the increase in operating