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Executive Summary
As one of the largest computer systems companies, Dell pioneered the concept of selling personal computers direct to customers with it’s build-to-order manufacturing system. Looking specifically at Dell’s working capital competitive advantage, several aspects put Dell ahead of the curve. Through Dell’s Direct Sales model, they get paid before they have to spend money, which reduces/eliminates accounts receivables. They also keep their inventories low which not only reduces the warehouse cost, but also minimizes the decreased value of inventory over time. Another advantage of orders manufactured on demand is that it allows Dell to quickly adapt and change when unexpected events arise such as product defects.
Using the the “Forecasted 1996 Balance Sheet” we can see that Dell is projected to have an additional $139.04MM in excess financing from 1995-1996. This free cash flow indicates that Dell was able to invest in its own operating activities needed to support the growth from 1995-1996. If Dell did not have sufficient free cash flow, it would be required to seek credit elsewhere, where they could choose from using short or long-term debt instruments.
In taking a deeper look at Dell’s internal funding options for projected sales growth of 50% in fiscal 1997, if Dell decided to repurchase $500M of common stock in 1997 and repaid its long term debt, the cash conversion cycle would need to be adjusted to achieve $0 of additional financing needed. In doing so, Dell can reduce accounts receivable and inventory built to order using an intermediary or creditor. This will cause accounts receivable to grow at a much slower rate than the sales growth rate. Instead of growing at 50%, accounts receivable will only grow at 10%. This is attainable by moving a considerable portion of the sales efforts toward online sales, a new method that utilizes the internet as a sales platform. If new customers purchase their computers through a third party
As one of the largest computer systems companies, Dell pioneered the concept of selling personal computers direct to customers with it’s build-to-order manufacturing system. Looking specifically at Dell’s working capital competitive advantage, several aspects put Dell ahead of the curve. Through Dell’s Direct Sales model, they get paid before they have to spend money, which reduces/eliminates accounts receivables. They also keep their inventories low which not only reduces the warehouse cost, but also minimizes the decreased value of inventory over time. Another advantage of orders manufactured on demand is that it allows Dell to quickly adapt and change when unexpected events arise such as product defects.
Using the the “Forecasted 1996 Balance Sheet” we can see that Dell is projected to have an additional $139.04MM in excess financing from 1995-1996. This free cash flow indicates that Dell was able to invest in its own operating activities needed to support the growth from 1995-1996. If Dell did not have sufficient free cash flow, it would be required to seek credit elsewhere, where they could choose from using short or long-term debt instruments.
In taking a deeper look at Dell’s internal funding options for projected sales growth of 50% in fiscal 1997, if Dell decided to repurchase $500M of common stock in 1997 and repaid its long term debt, the cash conversion cycle would need to be adjusted to achieve $0 of additional financing needed. In doing so, Dell can reduce accounts receivable and inventory built to order using an intermediary or creditor. This will cause accounts receivable to grow at a much slower rate than the sales growth rate. Instead of growing at 50%, accounts receivable will only grow at 10%. This is attainable by moving a considerable portion of the sales efforts toward online sales, a new method that utilizes the internet as a sales platform. If new customers purchase their computers through a third party