Q1 – The Competitive Advantage of Dell’s Working Capital Policy
Dell’s working capital policy which focused on maintaining a low, component-based inventory resulting in a shorter cash conversion cycle provides several advantages:
• Reduction in working capital required – Each reduction in days of inventory, reduces working capital required by ~$7.5m (See Exhibit 2). This is a significant advantage over Dell’s competitors (See Exhibit 3) such as Compaq who would have incurred additional costs as much as $307m due to additional days of inventory.
• Ability to change technology faster and reduce time to market – Dell can immediately begin building with the new technology unlike its competitors who have to remove old technology from finished products before installing the new.
• Reduction in obsolete goods – With low inventory, changes in technology and component obsolescence will be minimized.
Note: For Q1, Q2, Q3 Summary, refer to Exhibit 1
Q2 – Funding of 52% Growth in 1996
To the fund the 52% growth in 1996, Dell required working capital of $427m (See Exhibit 4). It was able to obtain this through both internal and external sources:
- Retained Earnings of $311m
- Net profits of $272m (Note: this profit does not adjust non-cash expenses such as Depreciation)
- Stock Issuance of $74m (net)
Dell had the ability to internally fund its growth but nevertheless also issued stocks. External sources of funding have inherent transaction fees such as interest or dividend payments or intermediary costs. External funding from loans can also provide substantial tax benefits. Since Dell has a low D/E ratio (0.26 in 1996), it has the ability to leverage further, if required.
Q3 – How to Fund 50% Growth in 1997
If Dell’s sales increased by 50% in 1997, this would require an increase in working capital of $387m (See Exhibits 6 & 7). Dell can fund this growth by:
• Internal sources:
- Retained Earnings up to the total available amount...