Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,

Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

Problem Statement

After a period of strong growth Dell faces a new challenge: continue to growth while

maintaining liquidity and profitably. With the increasing competition of bigger firms

Dell has to maintain significant levels of growth to be relevant in this market. Dell

needs to decide whether to finance this expected sales growth through debt, and if

so how much debt is needed, or through operational and profit margins

improvements.

Facts and Assumptions

Dells original business model based on a built-to-order operation and direct sales

distribution has been very successful. This strategy not only allowed Dell to

customize its computers and capture a new market segments of personal users and

small business but also allowed a more efficient use of the companys working

capital. The low WIP and finished goods inventories reduces its CCC; reduced

probability of losses associated with selling off excess inventory; reduced need of

hedging against input prices, specially favorable during periods of declining prices.

But it bears the following costs: increased risk of supply shortage due to

unanticipated demand spikes; and lack of economies of scale due with mass

production.

The decision to exit the indirect retail channel and focus on direct sales model in

1994 and the investment on the Pentium new technology allowed the company

reach a shorter Cash Collection Cycle close to 41 days (1995) and better profit

margins close to 5.2%. The DSI, DSO and DPO ratios seem to be stabilizing back to

1993 levels ( before the retail model was implemented) and Dells has in place

inventory, procurement and receivables capabilities that allow them to further

improve their working capital.

 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

In order to evaluate Dells working capital management performance and to

anticipate the companys cash needs, we forecasted the Dell's cash flow statement

for the fiscal years 1996 and 1997 based on the financial reports available in 1995

and 1996 respectively. The main assumptions used to build the P&L (Exhibit 1),

Balance Sheet (Exhibit 3) and Cash Flow Statements (Exhibit 4) were listed in

Exhibit 6.

Based on the inputs from the projected P&L Statement and Balance Sheet we

calculated Cash Flow Statements (Exhibit 4) and Sources and Uses (Exhibit 5). We

assumed the primary source of working capital financing would be available cash.

That also would be the criteria to determine whether or not Dell will need access to

external financing.

Analysis:

For 1996 our forecast shows a negative cash flow of US$23M, a very small amount

for a company the size of Dell, representing only 0.4% of sales. This amount the

company could easily finance internally, by using available cash ($55M) or from

short term investments, which we believe to be liquid bonds or stocks.

In fact, our forecasted 1996 financial performance were quite close to 1996 real

numbers, with expected income of 240 vs real income of 272. The cash flow

forecast was also very similar, with a forecasted cash flow of -$23M compared to a

real cash flow of $7M. Despite this small difference, some of the specific forecasted

cash flow lines were very different. We did not anticipate an increase in short term

investment, while in reality the company invested an additional $107M in them.

Accounts Payable increase, a source of financing, was a lot lower than we had

expected. But balancing out those increases in cash needs, Dell had a better

inventory management than forecasted due to its exit from mass stores. This also
 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

decreased the weight that retailers had on sales, and therefore, decreased days for

collection, resulting in a lower than expected Accounts Receivables. As a result

Dells operational improvements generated significant amount of cash to cover its

working capital, however they have also increased equity in order to finance its

investments, including a 53% increase in PPE and the huge increase in short term

investments.

When assuming sales growth of 50% from 1996 to 1997, and considering Dell keeps

a similar operational efficiency to 1996, our model shows that Dell would not require

access to external financing since the company has enough cash on balance to

cover its needs (Cash balance in 1996 is $55MM and forecasted needs in 1997 are

$(33)MM Exhibit 4). In fact, when we analyze Dells cash flow statement we can

see that the company is generating a positive cash flow thru its operations. The

need for cash then comes mainly to finance PPE expansion and other investments

necessary to support the companys growth. So, even if Dells maintain a 50%

increase in PPE they will be able to finance that with available cash. The company

could also refer to other sources of financing from within the company such as

liquidating some of their short term investments, especially given the considerable

value of such investments $591MM, or alternatively raising equity. Also, a sensitivity

analysis shows that an improvement of 1 day of DSO, would result in an increase in

cash of around $22MM. Similarly, improvements of 1 day of DSI or DSP would result

in an improvement in cash flow of around $17MM. Therefore, better managing their

working capital can have a large impact on the company's financing sources for

future needs.

Recommendations:
 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

After analyzing Dells just in time manufacturing system and evaluating its need for

financing for growths in sales in 1996 and 1997, the best alternative for Dell is to

finance this growth internally, without the use of external lines of credit and debt

increase. Given the companys recent success in improving its operation, including

its internal systems for forecasting, reporting and inventory control, while also

reviewing vendors to ensure on-time delivery and component quality, it is likely that

their need for cash will be reduced. Furthermore if they ever need more cash to

finance their operation, there are several alternatives that are more advantageous

to Dell before seeking external financing. The firm has been profitable for four of the

last five years, accumulating enough reserves to finance short-term growth. They

also have a considerable sum of Short Term Investments, almost 30% of total assets

in 1996, which could be quickly turned into cash. Therefore, by further improving

operations and tapping into cash and investments reserves, there is currently no

reason for Dell to seek external financing.

 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

Exhibit 1 - P&L Statement

Fiscal Year Fcst Fcst 1996 1995 1994
1997 1996

Sales $7,944 $5,282 $5,296 $3,475 $2,873

Cost of Sales 6,344 4,160 4,229 2,737 2,440

Gross Margin 1,601 1,122 1,067 738 433

Operating Expenses 1,035 743 690 489 472

Operating Income 566 378 377 249 (39)

Financing & Other Income 6 (36) 6 (36) 0

Income Taxes 166 103 111 64 (3)

Net Profit 406 240 272 149 (36)

Exhibit 2 - Working Capital Ratios

Fcst Fcst 1996 1995
1997 1996

DSI 37.0 39.1 37.0 39.1

DSO 50.0 56.5 50.0 56.5

DSP 40.2 53.7 40.2 53.7

DCC 46.8 41.8 46.8 41.8

Exhibit 3 - Balance Sheet

Fcst 97 Fcst 96 Actual Actual Actual
96 95 94

Current Assets:

Cash 22 20 55 43 3

Short Term Investments 591 484 591 484 334

Accounts Receivables, net 1,089 818 726 538 411

Inventories 644 445 429 293 220

Other 156 112 156 112 80

Total Current Assets 2,501 1,879 1,957 1,470 1,048

Property, Plant & Equip., 274 157 179 117 87

net
 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

Other 12 7 12 7 5

Total Assets 2,787 2,043 2,148 1,594 1,140

Current Liabilities:

Accounts Payable 699 613 466 403 NA

Accrued and Other 473 349 473 349 NA

Liabilities

Total Current Liabilities 1,172 962 939 752 538

Long Term Debt 113 113 113 113 100

Other Liabilities 123 77 123 77 31

Total Liabilities 1,408 1,152 1,175 942 669

Stockholders Equity:

Preferred Stock (Note a) 6 120 6 120 NA

Common Stock (Note a) 430 242 430 242 NA

Retained Earnings 976 551 570 311 NA

Other (33) (21) (33) (21) NA

Total Equity 1,379 892 973 652 471

2,787 2,043 2,148 1,594 1,140

Exhibit 4 - Cash Flow Statement

Fcst Fcst Real
1997 1996 1996

Net Profit 406 240 272

Inventories (215) (152) (136)

Accounts Receivables, net (363) (280) (188)

Accounts Payable 233 210 63

Other Current Assets 0 0 (44)

Accrued Expenses 0 0 124

Other Liabilities 0 0 46

Cash from Operations 61 17 137

Other Long Term Assets 0 0 (5)

Short Term Investments 0 0 (107)

 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

Property, Plant & Equipment, (95) (40) (62)

net

Cash from Investments (95) (40) (174)

Change in Equity 0 0 49

Long Term Debt 0 0 0

Cash from Financing 0 0 49

Increase/Decrease Cash (33) (23) 12

Exhibit 5 - Sources and Uses

Sources Fcst Fcst Real
1997 1996 1996

Net Profit 406 240 272

Accounts Payable 233 210 63

Accrued Expenses 0 0 124

Other Liabilities 0 0 46

Change in Equity 0 0 49

Cash 33 23 (12)

Total Sources 672 472 542

Uses Fcst Fcst Real

1997 1996 1996

Inventories -215 -152 -136

Short Term Investments 0 0 -107

Accounts Receivables, net -363 -280 -188

Other Current Assets 0 0 -44

Other Long Term Assets 0 0 -5

Property, Plant & Equipment, -95 -40 -62

net

Total Uses -672 -472 -542

 Dell - Antonio Ascar, Carolina Camargo, Daniel Loureiro,
Daniel Medeiros, Jean Paul Cordahi and Larissa Mattos

Exhibit 6 Model Assumptions

1. P&L Statement (Exhibit 1)
Net Sales: 52% sales growth in 1996 from 1995 (Sales = $5,282) and 50% sales
growth in 1997 from 1996 (Sales = $7,944).
COGS: Same 1995 gross margin in 1996 (COGS = 79% of sales) and same 1996
gross margin in 1997 (COGS = 80% of sales).
Opex: Same 1995 percentage of sales in 1996 (OPEX = 14% of sales) and same
1996 percentage of sales in 1997 (OPEX = 13% of sales).
Financing Income/Expenses: Same 1995 financing expenses in 1996 (-$36) and
same 1996 financing and other income in 1997 (+$6).
Income Taxes: Same 1995 percentage of operating income in 1996 (Income Taxes =
30% of operating income) and same 1996 percentage of operating income in 1997
(OPEX = 29% of sales).

2. Balance Sheet (Exhibit 3)

Assets:
Cash: Cash increase/decrease calculated from the Cash Flow Statement (Exhibit 4)
Inventory Turnover: Same 1995 DSI in 1996 (39.1) and same 1996 DSI in 1997
(37.0). (Exhibit 2)
Accounts Receivable: Same 1995 DSO in 1996 (56.5) and same 1996 DSI in 1997
(50.0). (Exhibit 2)
Short Term Investments and Other Current Assets: Remained constant in 1996 from
1995 and also unchanged in 1997 from 1996.
PPE: Increased in 1996 on the same ratio it did from 1994 to 1995 (34%) and
increased in 1997 on the same ratio it did from 1995 to 1996 (53%)
Other: Same in 1996 from 1995 and same in 1997 from 1996.
Liabilities & Stockholders Equity:
Accounts Payable: Same 1995 DSP in 1996 (53.7) and same 1996 DSP in 1997
(40.2). (Exhibit 2)
Accrued Expenses: Unchanged in 1996 from 1995 and also in 1997 from 1996.
Long Term Debt: Constant in 1996 and 1997 from 1995 ($113)
Other Liabilities: Same in 1996 from 1995 and same in 1997 from 1996.
Preferred/Common Stock: Remain the same in 1996 from 1995 and unchanged in
1997 from 1996.
Retained Earnings: 1995 retained earnings plus projected 1996 net profit in 1996
(Exhibit 1) and 1996 retained earnings plus projected 1997 net profit in 1997
(Exhibit 1).
Other Equity: Same in 1996 from 1995 and same in 1997 from 1996.