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Dells Working Capital Strategy analysis

Case Submission by: Tarun KSG Saurabh Thadani Srikanth Konduri Tushar Gupta Nikhil Gupta (10DM-162) (10FN-102) (10FN-109) (10FN-115) (10FN-121)

Group: G05

1. Dells Working Capital policy Pros: Low finished goods, low carrying cost, reinforces it custom build-to-order strategy In case of defective products, it is much quicker time to market Rolling out PCs with new OS, technology much faster than its competitors Helps it to pass on savings on customers, when the component cost is reducing Generates cash from maintaining Low Cash Conversion Cycle More sales can be stimulated on credit basis Low inventory with low fixed assets gives Dell a higher Return on Capital Employed Cons: It has led to the component shortages in 1996 Larger dependence on the on-time high quality supplies from manufacturers When product changes, process should start afresh by thrashing out existing ones

2. Assuming that the COGS per day remains same for the competitors of Dell: The carrying costs solely depends on the Days Sales of Inventory (DSI) During 1995: Cost of Sales = $2737 mn Cost of Sales per day = COS/365 = 2737/365 = $7.5 mn DSI(Dell) = 32; DSI(Compaq) = 73 So, Inventory holding of Compaq over Dell is in excess of= (73-32)*7.5 = $307.5 mn Because Compaq has to sell off its old inventory before purchasing new goods: Loss of benefits from purchase of low cost, (30% lower) new technology inventory Compaqs opportunity loss = 0.3*307.5 = $92.25 mn

3. Dells cash funding to achieve 52% growth in 1996 through internal means: Its Total Assets except short term investments should grow in proportion Lets define the assets mentioned above as TAESTI TAESTI1995=1594-484=$1110 mn; as percentage of sales in 1995=1110/3475=31.94% To determine TAESTI1996s contribution, TAESTI ratio to sales in should remain intact Required increase of TAESTI to meet 1996 growth=0.3194*0.522*3475=$579.37 mn

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CF-2 Assignment

Dells Working Capital Strategy analysis

Group: G05

It should be met without the support of increase in account payables: Lets define Cumulative liabilities without account payables as TLEAP o Increase in TLEAP contributed to the cash flow o Cash flow from TLEAP, TLEAP1996-TLEAP1995=(2148-466)-(1594-403)= $491 mn Net Profit1995 as a percentage of Sales in 1995 = 149/3475 = 4.29% o To determine Net Profit1996s contribution, its ratio to Sales should remain intact o So, cash flow from Net Profit1996 =0.0429*1.522*3475= $226.89 mn

As cash inflow (491+226.89= $717.89 mn) is more than required cash outflow of $579.37 mn, it can be inferred that Dell got enough money to fund the growth in 1996 internally. 4. Dells ability to fund its growth of 50% in 1997 internally: TAESTI1996=2148-591=$1557 mn; as percentage of sales in 1996=1557/5296=29.4% Required increase of TAESTI to meet 1997 growth=0.294*0.5*5296=$778.51 mn TLEAP1996 as a percentage of Sales in 1996 = (2148-466)/5296 = 31.6% Cash flow from TLEAP, TLEAP1997-TLEAP1996=2523-(2148-466)= $841 mn Net Profit1996 as a percentage of Sales in 1996 = 272/5296 = 5.14% So, cash flow from Ops Profit1997 =0.0514*1.5*5296= $408.32 mn

As cash inflow (841+408.32= $1249.32 mn) is more than required cash outflow of $778.51 mn, it can be inferred that the growth in 1997 can be funded internally. 5. Increased requirement of cash to buy-back the equity worth $500 mn, along with repayment of long-term debt of $113 mn, along with maintaining 50% growth: The overall cash requirement will be increased now by: 500+113+778.51 = $1391.51 mn It will be met partly by Short Term Investments = $591 mn By improving profit margin from 5.14% to 6.6%, increased contribution = $524.3 mn So, the remaining cash flow to be met = 1391.51-591-524.3 = $276.21 mn By improving the Cash Conversion Cycle, cash inflow will improve and meets needs: DSI=31 days, reducing it by 3 days saves carrying cost:3*1.5*4229/365=$52.15 mn DSO=42 days, reducing it by 6 days reduces receivable: 6*1.5*5296/365=$130.6 mn DPO=33days, increasing it by 6days improves payables:6*1.5*4229/365=$104.2 mn

So, the increased cash inflow out of operational improvements will be: 52.15+130.6+104.2=$286.95 mn; as Dell already faced problem with component shortages in 1996, it will not look into reducing its DSI by a large margin. As $286.95 mn obtained through operational process improvements coupled with short term investments of $591 mn and a net profit of $524.3 mn is surpassing the required cash flow of $1391.51 mn which, Dell will be able to fund its growth of 50% in 1997, after paying long-term debt of $113 mn & buying back equities worth $500 mn.

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CF-2 Assignment