LAHORE SCHOOL OF ECONOMICS

DELL'S WORKING
CAPITAL
Case Analysis WACC
Muhammad Hassan
Sharjeel Shahid
Bushra Javed
Uzair Nasir
Ch Usman
Mahnoor Malik

The case highlights the importance of Working Capital Management in a rapidly growing firm
like Dell.

The Case:
The case highlights the importance of Working Capital Management in a rapidly growing firm
like Dell.
The Company:
Dell Computer Corp was founded in 1984 by Michael Dell. Company manufactures sells
and services high performance personal computers compatible with industrial standards. Initially
company purchased compatible personal computers and after upgrading them they sold these
PC's directly to the customers by mail orders. But then company decided to began distributing its
own brand PC's by taking direct orders through toll free telephone. They follow built-to-order
model which enables dell to have a much smaller working capital requirement compared
to its competitors. Selling directly to customers was Dell's core strategy and USP.
This build to order model (Customization) allowed Dell to enjoy the benefits of
reduction in component prices as well as it allowed the company to introduce new
technology before its competitors. It also helped the company in reducing cost for
keeping inventory. Dell kept a sizeable finished goods inventory in the stock or at
their channel partners based on the forecast.
The Issue(s):
The issue is that the management needed a plan for financing the future growth of the company.
Till now, dell had financed its growth internally.
Analysis
Dell Inventory Management
Its major competitors including the industry leaders were Compaq, Apple and IBM.

In 1990 while Dells competitors were keeping around 50% to 70% of finished goods
out of total inventory. Dell was able to maintain 10% to 20%. This was because dell
sourced the components from 80 suppliers who were close to Dell's Texas and Ireland
plants and they delivered the parts to Dell on daily purpose. Small inventory balance
means:

Less expensive to shift to latest technologies (mainly by Microsoft, Pentium).

Providing the latest system at the same price as competitors outdated PC's.
Not keeping excess stock helps company to save room spaces and capital.

Particulars
Current Assets

1996
1957

1995
1470

Others

156

112

Inventories

429

293

Current Liabilities
Net Working Capital
Current Ratio

939
752
1018
718
2.08413206 1.95479

Quick Ratio

1.46112886 1.41622

Cash Conversion Cycle

(Avg)

41.25

38.5

1994 Particulars
1048 Net Income
80 Shareholders
Equity
220 ROE
538 Sales
510 CGS
1.9479 WC Turnover
6
1.3903
3
47.5

1996
272

1995
149

1994
-36

973

652

471

0.27954779
5296
4229
5.20235756

0.2285 -0.0764
3
3475
2873
2737
2440
4.8398 5.63333
3

The above table shows calculated Net working capital (Current Assets - Current
Liabilities) for year 1996, 1995 and 1994 simultaneously 1018, 718 and 510. And Net
working capital turnover which will tell how well a company is utilizing its working capital
to support its sales. (i.e) 5.2, 4.8 and 5.6. Return on equity which measures a firm's
efficiency at generating profits from every unit of shareholders' equity (i.e) 0.2, 0.2 and -0.07.

In 1996 Dell introduced Pentium Technology after which unit sales grew by 48%. Where as
average unit revenue grew by 3%. During the whole year operating assets grew 30% of sales
which we have proposed the same growth rate for the next year 1997 (Forcasted year). Net
profits were 5.1% of sales. Cost of goods sold were 80% of sales.
With 30% increase in growth rate for the year 1997. Sales grew to $6877m and net profit became
$243m while gross margin was $1377m. So internal growth can be funded