Dell’s Working Capital Exercises
Autor: weleee • May 28, 2015 • Case Study • 337 Words (2 Pages) • 1,530 Views
Dell’s Working Capital Exercises
1. The unneeded investment is the investment that Dell can save on its inventory. Having fewer days of inventory, which is also Days Sales of Inventory (DSI), also means Dell doesn’t have to maintain high levels of inventory to sock reseller and retail channels, providing a competitive advantage for Dell.
2. Having lower inventory prevented Dell from losing the value of inventory, which is an average of 30% a year. Since Dell lost less value of inventory than Compaq, it results in a potential margin advantage for Dell.
3. As a company grows, its short-term and long-term assets also grow. The company needs more working capital and debts to maintain its operations. The internal financing will not be enough, so the firm will have to go to the capital markets for financing.
4. Financing requirements are less than the total growth in assets because the company can use its net profit to cover parts of the investment on assets.
5. The required change in each of the four operating variables － DSO: -17.05, DSI:-21.35, DPO: 21.35, GM: 6.67%
For each of the four possible actions, the key business obstacle to changing it is to keep the estimated numbers such as Sales and COGS unchanged. There would be some interactions between those four actions and Sales. While we are trying to decrease A/R and inventory, and increase A/P and gross margin, the actions will influence the company’s revenue and costs and, hence, result in other different situations.
6. As a company grows, the numbers of its suppliers and inventories also grow. It means the payment that the company has to pay its suppliers also increases. If the company always pays its bills on time and actively builds good relationships with its suppliers, it can benefit from a shorter cash cycle by increasing its accounts payable. If the company doesn’t have good credit and is trying to aggressively increase its accounts payable, its vendors or suppliers might have to worry about the risk of not receiving the payment in time.
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