Dell Working Capital Case

1. Ststement of Problem

Dell is anticipating growth of 50% in 1997 and expects to beat the industry growth forecast. With this in mind we need to analyse how best we can arrange funding to support this growth.

2. Statement of Facts and assumptions:

A few facts - Dell has been successful in sustaining competitive advantage and maintaining profitability for the following reasons:

1.    It maintains the lowest inventory of FGI and WIP as it makes computers only on order.

2.    As a result of item 1) it has substantial cost savings in terms of low inventory stocking costs and the fact that it can adopt new technology a lot more rapidly with minimal wastage of redundant outdated stock.

3.    Another advantage of manufacturing just in time computers (other than configuration flexibility to match customer needs) Dell could keep its working capital in check. As can be seen from exhibit 2 in the dells working capital financial ratio. There is a steady decline of "Days sales of inventory".

4. Dell has witnessed a growth of 52.4% in 95-96 and has a gross margin of 20.5 percent.

Assumptions:

1. The gross margin on sales would continue to remain 20.5 percent.

2. Dell will continue to operate with same efficiencies in operation.

3. Inventory levels of wip and FGI will continue at 10 to 20 percent of sales.

4. The average CCC will be at 41 days.

5. AR remains at 14% of sales and AP at 9 percent of sales.

6. Cash and short term investment remains at 12 to 15 percent, we assume that it remains at 12% of sales.

7. Tax rate remains at 30% as earlier years.

8. R and D expenses remain at 2% of sales.

9. PPE growth remains at 53% as it was in 1995.

10. Depreciation of ppe at 14.5%

11. Interest expense is taken at 6%

13. Assume that short term investment are fairly liquid and can be treated as a part of the working capital.