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Group case study: Dell’s Working Capital. Working capital

1. What are the competitive advantages of Dell Computer Corporation's business model?
Conceptually identify its main financial variables. A SWOT or a canvas analysis can be used.

Strengths

-Unique customization system: with the build-to-order model, the company can manufacture
customized products which are made when the customer orders to purchase the product. It guarantees no
goods are obsolete.

-Inventory Management: Just-in-time inventory system allows for capital conservation. The build-to-
order manufacturing process yielded low finished goods inventory balances, resulting in more significant
profit margins. In Dell, the percent of total inventory ranged from 10% to 20% whereas some of the industry
leaders, such as Compaq, Apple, and IBM, ranged their WIP and finished goods inventory from 50% to 70%
of total inventory and this is majorly justified because they created their products in base of supply demand
nor order demand.  
WIP (work in process) and finished
Total
inventory total
Dell 10% to 20%
50% to 70%
Compaq / Apple / IBM WIP

-Inventory Saving: Reduce Inventory Loss = (DSI) * (Dells COGS/365) = $239.96 million
Inventory
Table1
Company Savings
DSI 1995
million
Dell 32  
Apple 54 $ 164,97
Compaq 73 $ 307,44
IBM 48 $ 119,98
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Average Industry 52 $ 148,10

Taking into account the cost of individual components, such as processor chips, comprised about 80% of
the cost of a PC. In addition, their components were sourced from 80 to 200 suppliers, so they could
prevent a stock-out, and thus they would have always the components to provide their customers with their
orders. 

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-Strong customer base: provide toll-free telephone and on-site technical support in order to create a
better and strengthened customer service to provide customers an Omnichannel experience.  It helps to
identify too customer’s needs before the competitors.

-Direct sale: Dell make business directly with customers and businesses, maintaining their less profit
margin. For this reason, the company has relatively low running costs compared to sales. They also
guaranteed their suppliers had warehouses near Dell’s Austin Texas and Ireland plants so the components
should be delivered on a daily basis and the delivery of this cost would be cheaper than if the warehouses
were located far away. 

Weaknesses

-Poor R&D: Compared to its competitors, Dell spends a short part of its income on R&D, closing a way to
improve its products or develop new ones.

-Not a lot of visibility: selling only online gave them less visibility and a bit of mistrust because the
customers cannot go to a physical shop to see and try them.

-Very low level of differentiation in their products.

-The purchasing process is not easy compared to products from other companies, because the
customization process takes a long time to be finished.

Opportunities

-Open retail locations where customers can go and purchase directly the products.

-Create partnerships with big distributors all around the world and expand the company.

- Thanks to its R&D, Dell can develop new products and introduce them in the market, or explore new
technological segments (smartphones, tablets, etc...).

-Networking and social networks: focusing on the Omnichannel experience, the company can improve
its networking and social networks services to offer to customers a 360° experience.

- Create Brand Awareness, to better known Dell all around the world for its high-quality products.

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Threats

-Hard and large competition among the computer market competitors at a global level can make
it difficult for Dell to survive. Plus, new companies can have easy access to the market.

-New products can be launched in the market from Dell's rivalry and a fierce price war can be made
to gain customers and increase market share.

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-High prices for hardware: hardware goods are the pillar income of Dell and they could be more
expensive in the future due to the rising in the prices of raw materials.

2. Prepare a three-year net income statement forecast based on information from the case
study.
Starting from the financial vertical and horizontal analysis of DELL’s Company (Richard Rubak, 15
December 2003), we decided to prepare 3 scenarios for the three-year net income statement forecast. The
worst, the medium, and the best scenarios (UNIR, 2021).
In the worst scenario, we assumed that sales would increase each year by a 20%, the same percentage of
growth that the industry analysts anticipated for the computer market.

Then, for the medium scenario, we assumed that the sales would increase by 30% each year, a 10% more
than the supposed market growth.

For the best scenario, the percentage for sales growth would be a 50% for each year; it would be the best
perspective
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de La Rioja the prediction of Michel Dell, Dell’s CEO, to “outpace the industry’s growth”.

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3.Prepare a three-year financial position statement forecast based on information from the
case study.
We prepared also for the three-year Balance Sheet forecast, three Balance Sheets according to the 3
scenarios that we were supposed to have. In all the scenarios, we maintained the same amount of the FY
1996, except for the Accounts receivables where we used 49 days of sales outstanding, the Inventories where
we used 37 days of sales of the inventory, and the Accounts Payable where we used 40 days of payables
outstanding. Regarding the Retained Earnings We retained all the net profit every year (UNIR, UNIT 2.
INTRODUCTION OF FINANCIAL STATEMENTS. PART I, 2021).
-Worst case scenario:

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Medium case scenario:

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Best case scenario:

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4.Calculate the working capital and operational finance requirements for the same time
horizon.

-Worst Case Scenario:

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-Medium case scenario:

-Best case scenario:

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5.What are the main conclusions and implications from the forecast financial statements
and financial analysis?
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-The company has a positive cash flow in the three scenarios, so it is not necessary to use external financing
for its operation.
-The company can finance its additional working capital needs with internal financing sources.
-The company has an excellent cycle of return on the money invested in the production of computers since
its inventory turns over every 37 days, customers pay every 49 days, and suppliers are paid every 46 days.
Therefore, it is only necessary to finance 46 days of the company's operation, which is carried out with own
funds from monthly net profits. Additionally, the company's operation generates an excess of cash, which is
invested in short-term investments, which have been increasing consistently since fy 1994.
-The company has an average liquidity ratio of 2, which means that it can cover two times its short-term
obligations.
-Since the company changed its initial focus from only worrying about growth to measuring liquidity,
profitability, and growth rates, it closed the distribution through large distributors, which have greater
negotiating power and extended payment periods. In addition, it focused on improving its delivery
performance, which gives it a higher profit margin and more significant contact with the needs of its
customers, reducing the payment time of customers, and now they have a remarkable ability to anticipate
changes in the demand thanks to direct contact with customers.
-Its just-in-time business model allows it to introduce new technologies in less time than its competitors,
achieving a competitive advantage by reducing the time to market its products.
-The conversion of its preferred shares into ordinary shares allowed the company to have a more significant
margin of maneuver by not having an obligation to pay preferred dividends and leverage its growth through
the reinvestment of retained earnings.
-There is correct financing of the fixed assets, supported with long-term credits.
-We recommend that the company keeps a lower level of cash since it misses the opportunity to invest these
resources and generate more income.
-With the forecast of the sales made, the goal of obtaining a 5% net profit continues to be achieved.
-The more sales increase (see scenarios 2 and 3) between 30% and 50%, the company continues to have the
ability to finance its working capital needs with internal sources.
-Better credit terms must be obtained from suppliers so that the company can repay its debts within the
claim period. This will also help improve the cash conversion cycle.
-There are only two forms of internal or external financing. If the company chooses to reinvest (part or all)
of thede previous
sidad Internacional year's
La Rioja (UNIR) $272 million profit, it may choose to internally finance growth. In this case,
shareholders will receive no profit or only a fraction of the profits generated during the period. Debt
financing can also be used, in two ways: one is to raise funds for the company (issue and sell stock), and the
other is to borrow (increase long-term debt) through the stock market (issue of stock). Moreover, selling
shares. Selling bonds or through the banking system (by applying for a loan from a bank).
-While a company can finance its growth from internal sources, it must also consider that the cost of equity
is higher than the cost of debt. In addition, it has a low debt ratio of nearly 55%, which leads us to believe
that increasing the participation of debt capital in the company's financing structure is still possible,
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reaching an optimal level of 70% assets. Increased debt participation can achieve several goals. First, debt
brings tax advantages. Second, the company’s cost of capital has improved, making it more profitable.
Third, it will generate greater profits. Fourth, is financial risk-sharing.

Bibliography
Richard Rubak, A. S. (15 December 2003). DELL'S WORKING CAPITAL. Harvard Business School.
UNIR. (2021). UNIT 2. INTRODUCTION OF FINANCIAL STATEMENTS. PART I. Financial in Digital Environment
UNIR. (2021). UNIT 3. INTRODUCTION OF FINANCIAL STATEMENTS. PART II. FINANCIAL IN DIGITAL
ENVIRONMENT.

sidad Internacional de La Rioja (UNIR)

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