Dell was able to finance its 52% sales growth in 1996 through internal resources without relying on external funding. It achieved this by reducing its current assets from 32% to 29.4% of sales, improving operational efficiency. This reduced the additional operating assets needed from $582 million to $447.5 million. Increased liabilities of $187 million and higher than expected net profit of $272 million exceeded this requirement. For 50% sales growth in 1997, increased liabilities, projected net profit, and existing short-term investments could provide $1584 million, well above the $779 million needed for additional operating assets. Dell's efficient build-to-order model and use of working capital gave it strong internal funding capabilities.

1. Corporate Finance
Assignment #4 – Dell’s Working Capital
EPGP 2009-10 - Term III- Individual Submission
20-Jan-2009
Instructor: Prof. A. Kanagaraj
Submitted by:
Rajendra Inani - #27
CF –Individual Assignment#4 Page |1

2. Table of Contents
2
1 Dell’s Working Capital .......................................................................................................................3
2 Competitive Advantage......................................................................................................................3
3 How Dell funded its fiscal 1996 sales growth ....................................................................................3
4 Dell’s internal funding options for projected sales growth of 50% in fiscal 1997 ..............................5
CF –Individual Assignment#4 Page |2

3. 1 Dell’s Working Capital
Dell manufactures, sells, and services personal computers. The company markets directly to its
customers and builds computers after receiving a customer order. This build-to-order model enables Dell
to have much smaller investments in working capital than its competitors. It also enables Dell to enjoy
more fully the benefits of reductions in component prices and to introduce new products more rapidly. Dell
has grown quickly and has been able to finance that growth internally by its efficient use of working capital
and its profitability.
2 Competitive Advantage
The extent of Dell’s working capital advantage over its competitors can be assessed using data contained
in Table A of the case on days sales of inventory (DSI) for Dell and its competitors. In 1994 and 1995,
Dell’s DSI was about half the level of its competitors. In January 1996, for example, Dell had inventory to
cover 32 days of sales while Compaq Computer had inventory to cover 73 days of sales. One way for
students to quantify Dell’s competitive advantage is to calculate the increase in inventory Dell would have
needed if it operated at Compaq’s DSI level. Using Dell’s cost of sales (COS) for 1995 contained in
Exhibit 4 and the information on DSI contained in Table A:
Additional inventory at Compaq’s DSI = ( Dell’s COS) (Compaq’s DSI – Dell’s DSI)/360 days = [($2,737)
(73-32)]/360 = $312 million.
This $312 million, in perspective, represents 59% of Dell’s cash and short term investments, 48% of
stockholder equity and 209% of its 1996 income.
3 How Dell funded its fiscal 1996 sales growth
In order to determine how Dell funded its fiscal 1996 sales growth, we must first analyze how much fund
Dell exactly needed to sustain such 52% growth in 1996.
Operating Assets = Total Assets – short term investment = $1594 - $484 = $1110
The Operating assets in proportion to sales = $1110/$3475 = 32%
Sales increased from $3457 in 1995 to $5296 in 1996. From our previous calculations, we have found
that operating assets are a proportion of sales and would therefore equal 32%. In order to figure out the
required amount of increase in operating assets as a result of an increase in sales, we should multiply the
increase in sales by 32%. Therefore, 0.32 x (5296-3457) = $582 million, which would be the total
operating assets that Dell would need to fund in order to sustain the 52% growth in sales.
Liabilities in proportion to sales in 1995 = $942/$3475 = 27.1%, Increase in liabilities in 1996 =
(5296-3475) x 0.271 = $494
Therefore, Dell would have the increase of 582 million in operating assets, there would also be a 494
million increase in liabilities.
Short Term investments would remain the same, since it is not directly related to operations.
Net Profit / Sales = $149/$3475 = 4.3%, Operational profits = 5296*4.3% = $ 227 million
CF –Individual Assignment#4 Page |3

4. In all, we have calculated that with the sales increase of 52% there will be $582 million operating assets
that Dell should fund. The 52% sales increase would also bring additional $494 million in liabilities, while
generating 227 million of operating profit yet the short term investment would remain unchanged at $484
million. As a result, any two combination of liabilities, operational profit, or short term investment will be
sufficient to offset the %582 million operating assets needed to sustain the 52% sales growth in 1996.
Based on previous calculations, we find that in order for Dell to finance its 52% growth, the firm will
require 582 million in terms of increase in operating assets. Nevertheless, this number can be further
reduced if the company undergoes internal process improvement, which would result in higher asset
efficiently.
For 1995, the operating assets in terms of % of sales can be calculated once again by subtracting short
term investment from total assets, and the number comes out to be around 31.94%.
Likewise in 1996, the operating assets = 2148-591 = 29.4%
Difference of the year 1995 and 1996, 31.94 – 29.4 = 2.54%
There is decrease in operating assets by 2.54% in year 1996, operation efficiency has improved by this
amount. Thus, decrease in operating asset in 1996 = 5296 x 2.54% = 134.5 million
This amount can be further reduced from the original forecast $582 million required for 52% growth in
1996. The higher asset efficiency can be achieved through reducing company’s current asset, which
includes cash available, account receivables, inventory, or other current assets. Thus, actual additional
operating asset needed to fund the 52% increase in sales = 582 – 134.5 = $447.5 million
To put everything in perspective, we need to compare both sides of the balance sheet to determine if
additional fund is needed. In other words, the sum of current liabilities, long term debt and retained
earnings needs to exceed the sum of current assets and fixed assets for Dell to avoid raising public fund
such as issuing more stocks.
Based on the numbers provided by Ex4 and Ex5 of the case, we find that the retained earnings (Net
Profit) come out to be $272 million, and there is no difference in long term debt. The $272 million in net
profit is an increase from the forecasted $227 million and can be attributed to improved net margins from
4.3% to 5.1%. Also, we can calculated that the increase in current liabilities = $939 - $752 = $187 million.
Based on the balance sheet, we find that total liability together with a higher than anticipated net
profit is larger than the additional operating asset requirement calculated, $272 + $187 = $459
million > $447.5 million. Therefore, without relying on external alternatives, Dell was able to fund
its 1996 sales growth through internal resources, i.e. reducing its current assets and increasing
its net margin.
CF –Individual Assignment#4 Page |4

5. 4 Dell’s internal funding options for projected sales growth of 50% in fiscal
1997
Operating assets as a % of sales for 1996 = Total assets – Short Term Investments
= $2148 - $591 = $1557 million
Percentage of Net profit as a % of sales for 1996 = Net Profit / Sales = $272/$5296 = 5.1% of Sales
When sales increase by 50%, we must also assume that operating assets will also be increased by the
same amount. Hence for 1997, Dell requires $1557 x 1.5 = $2336 million of worth of operating assets.
Thus, an increase in sales of 50%, the increase in operating assets from 1996 – 1997 would amount to
$2336 - $1557 = $779 million.
The liabilities and net profit as a percentage of sales will also be increased proportionally by 50% for
1997. Thus, % of Net Profit (1996) x Sales (1996) x 1.5 = 5.1% x %5296 x 1.5 = $405 million. Total
liabilities as a % of sales would equal Liabilities (1996) x 50% = $1175 x 0.5 = $588 million.
Considering that short term investments will be around $591 million in average for 1997, we have a total
of $405 + $588 + $591 = $1584 million which is well above the required increase of sales in operating
assets ($799 million). Therefore, with the increase in liabilities, projected net profit for 1997, and
current short term investment, Dell will have enough money for internal funding.
Dell may choose any way to allocate these funds. For instance:
1. If their short term investments have shown phenomenal growth, they may decide to realize these
gains and sell off all of these investments, which would then cover most of the required operating
assets.
2. If the cost of new debt is high, they may choose not to increase their liabilities and instead fund
the growth with short term investments and their net profits.
3. Alternatively as an option for internal funding, Dell could sell its fixed assets, or reduce inventory,
accounts receivables, and increase payables.
The latter brings up the idea of working capital improvements. If we look at Dell’s operations and their use
of JIT, it is highly plausible for them to achieve a negative Cash Conversion Cycle. If they receive terms
from their suppliers of 30-45 days while also using JIT to receive immediate payment from customers, it is
possible to improve working capital from the previous year by reducing inventory and receivables.
Furthermore, with their size and influence, they can demand increased payment terms and limits, thus
increasing accounts payable period. This all combines to the possibility of a negative Cash Cycle and the
ability to fuel the company’s growth.
Finally, we see that Dell has the potential to utilize $1584 million towards their internal growth.
This amount is easily able to cover the required forecasted amount of operating assets of $779
million. With the reminder of the funds, it is possible for Dell to utilize it to pay off long term debt
or to buy back common stock thus increasing EPS.
CF –Individual Assignment#4 Page |5