Dell’s Working Capital Case

Dell’s Working Capital Case

Question 1.

As the projections in Exhibit 5a shows, assuming Dell did not improve its operations 1n 1996, when the sales increased from $3475M in 1995 to $5296M in 1996; thus, the operating assets (total assets minus S/T investments) in 1996 need to grow by the same proportion to support the sales growth i.e. 52.4%., the increased operating assets in 1996 is $2177-$1594=$583M. If Dell choose to fund the sales growth internally, the sources of the fund would come from the increased current liabilities (free financing from suppliers) and the expected net profit in 1996. That means the total internal cash inflow must be:

($1146-$752) + ($5296*4.29%) = $620M  

•4.29%: the profit margin in 1995

•$752M: the current liabilities in 1995

•$1146M: the expected current liabilities in 1996

We found out Dell had sufficient money to fund the sales growth in1996 internally, because the internal cash inflow i.e. $620 was larger than the required fund i.e. $583.

Compared the realization in Exhibit 5 to the pro-formas in Exhibit 5a, it can be inferred that Dell funded the sales growth internally and externally.

Internal source:

 Net profit=$272M

Noticing the profits margin went up to 5.14% from 4.29%, given that:

• Improved its operation, so the operating expenses/sales dropped from 14.07% in 1995 to 13.02% in 1996.

• Financing & other income i.e. 6-(-36) = $42M, benefitted from the increased S/T investments = $591-$484= $107M.

 Increased current liabilities= $939-$752= $187M

External source:  Issued more common stock: $188-$114=$74M

               • The change in common stock= $430 - $242= $188M

               • Conversed preferred stock into common stock=$120-$6= $114M                                      

Improvements in operation in 1996:

• Shorter DSI

In 1995, Dell converted its entire major product line to the Pentium technology; thus, the firm can lower finished good inventory by offering faster system, made it less costly for it to move quickly.

• Shorter DSO

Using a direct channel, Dell was able to quickly manufacture the newest production and ship to customers, while others still had a large number of lower class productions.

Question 2.

Pro-forma

Income statement