Analysis of Working Capital Strategies;

Dell’s Perspective

Date of Submission: 20th September 2020

 F- 405
Analysis of Working Capital Strategies; Dell’s Perspective

Submitted to:
Shabnaz Amin Auditi
Associate Professor
Department of Finance
University of Dhaka

Submitted by:
Group 2
Batch: 23rd
Section: B
Department of Finance
University of Dhaka

Date of Submission: 20th September 2020

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Group Profile:
SL No Student’s Name ID No Remarks
01 Rakib Mostak 23-020
02 Israt Jahan Ritu 23-084
03 Risha Afsara Fariha 23-145
04 Sifat Zahan Mim 23-188
05 Afia Siddique 23-313
06 Bir Bahadur Tripura 23-323

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 Contents
1.0 Case Overview .......................................................................................................................6
2.0 Problem Defining; Analyst’s Perspective ................................................................................6
2.1 Scenario Analysis ...............................................................................................................6
2.1.1 Working Capital Policy as the Competitive Advantage ................................................6
2.2.2 Dell’s Growth in 1996 .................................................................................................7
2.2 Problem Statement ...........................................................................................................9
3.0 Developing Solution Alternatives ...........................................................................................9
3.1 Funding Growth of 50% in 1997 .........................................................................................9
3.2 Recommending Alternatives of Working Capital Strategy ................................................10
3.3 Scenario of Capital Restructuring; Growth Funding in 1997 .............................................10
4.0 Defining Decision Criteria ....................................................................................................11
4.1 Decision Objective ...........................................................................................................11
4.2 Current Strategy Analysis.................................................................................................11
4.2.1 Working Capital Strategy ..........................................................................................11
4.2.2 Financing Strategy ....................................................................................................12
4.2.3 Profit Scenario ..........................................................................................................12
4.3 Decision Dimensions ........................................................................................................12
5.0 Analysis and Evaluation of Alternatives ...............................................................................13
5.1 Evaluation of Internal Financing Alternatives ...................................................................13
5.2 Recommendations for Working Capital Strategy .............................................................13
5.2.1 Cash Forecasting; Working Capital Perspective .........................................................13
5.2.2 Investment Strategy; Working Capital Perspective ....................................................14
5.2.3 Evaluation of Investment Strategies; Profit Perspective of January ...........................14
5.2.4 Analyzing Effect on Net profit ...................................................................................14
5.3 Financing Sales Growth in 1997; Capital Restructuring Perspective .................................15
5.3 2 Incremental Value Analysis .......................................................................................15
6.0 Decision Optimization and Implementation Plan .................................................................16
6.1 Analysis of Preferred Alternative .....................................................................................16

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 6.2 Solution Outlining ............................................................................................................16
6.2.1 50% Growth Strategy without Restructuring .............................................................16
6.2.2 Working Capital Strategy ..........................................................................................17
6.2.3 50% Growth with Capital Restructuring ....................................................................17
6.3 Implementation Plan .......................................................................................................18
6.3.1 General Implementation Plan ...................................................................................18
6.3.2 Implementation Schedule .........................................................................................19
7.0 References ..........................................................................................................................21
8.0 Appendix .............................................................................................................................22
8.1 Working Capital Scheduling .........................................................................................22
8.2 Restructuring Perspective; Working Capital Strategy .......................................................23
8.3 Effect of Growth Funding in 1997 (Projection) .................................................................24
8.4 Cash Forecasting; 1997 1st Quarter ..................................................................................25
8.5 Investment Planning ........................................................................................................25
8.5.1 Stone Model Application...........................................................................................25
8.5.2 Investment Planning Schedule ..................................................................................26
8.5.3 Stone Model Assumptions ........................................................................................26
8.5.3 Fund Available for Investment ..................................................................................26
8.6 Quarterly Working Capital ...............................................................................................27
8.7 Financing Portfolio in 1996 ..............................................................................................27

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1.0 Case Overview
The buzzword “technological revolution” was thriving during the 90’s decade when Dell was
born. The scenario states the journey of Dell along with the dynamic passages of computer-
hardware industry of America. When Dell entered the market, the initial move was to go for a
vertical integration with IBM. Basing on IBM’s brand, the company created their existence. But,
along with the time preceded, the industry became more competitive. Thus, Dell introduced
another strategy “built-in order” to survive over the competition, thus gained competitive
advantage internally through the working capital tactics. After beginning with only 1% industry
share, the founder anticipated the potential threats of consolidation in the fragmented industry
of America. Though they moved on to an extended supply chain for sales growth, regretfully Dell
was subjected to their huge corporate loss of $76 million along with a decline in net margin. It
was supposed to be growing revenue instead, which was not practical due to the dynamic
consumer perceptions. Without the sole focus on growth, Dell concurrently shifted focus toward
liquidity and profitability due to the previous performance decline. After changing the focus, Dell
beat the industry with its 52% growth in 1996, which was not in the estimations of the founder,
rather he hoped to hold only 5-10% industry pace. Hopefully, the founder, Michael Dell is
assuming the growth to be 50% in 1997, which will again outpace the industry growth.

Now, it is ambiguous in the stated scenario, and is a matter of researcher’s concern, what should
be the optimum working capital and profit modification tactics recommended for Dell, which
should be supported by other industry journals and financial statements. Besides, the query also
stands for Dell, what would be their growth policy if they would repurchase $500 million of
common equity, while repaying all leverages of long term.

2.0 Problem Defining; Analyst’s Perspective

2.1 Scenario Analysis
The core oath of a potential start-up is to reflex the macro environment and micro aspects in
their corporate strategies. Dell started in a highly competitive industry (Wikipedia, 2020). In one
extent, they had to care about technological revolution, consumer perspective, to another extent
of dynamic moves of competitors. Following the whole scenario, the researcher focuses on the
leading issues was being faced by dell.

2.1.1 Working Capital Policy as the Competitive Advantage

In this stated scenario, the industry, where Dell belongs is highly competitive. It is required to
analyze in this segment that, how the company gained a great advantage over its competitors
through its working capital policy (Chen and Tian, 2019). As the scenario stated, in the 90’s
decade, when Dell started own branding, the strategy was following “build to order model” of

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inventory management as the leading tactics of working capital management, which contributed
to attaining the competitive advantage over the competitors. But, how this happened? According
to the theory of porter model, the competitive advantage comes with three distinct forms, which
are the probable alternatives; cost leadership, differentiation and focus (William, 2018).

Dell strictly followed the “Built to order” model. This model in specification deals with providing
customers directly what they want, along with integrating with IBM for inbound components.
Through using this model, Dell established three core golden rules for their strategy; disdain
inventory, mass customization and direct selling. How this influenced the working capital policy?
Working capital policy is the differential between the current assets and current liabilities. Due
to utmost mass customization, Dell was able to provide the exact demand satisfying products to
customers, thus they could raise the consumer demand. Besides, the just in time inventory
management reduced their inventory holding to 20%, which is much lower than the competitors.
The inventory turnover was 122 per year which was an efficient lean expertise. The direct selling
strategy enabled them to skip the distributor group leading to lower the cost. These altogether
resulted in lower inventory holding, lower account payable as well as minimized account
receivable. The minimal working capital figure held mostly the cash figures, which were freed up
from idle resources. The low holding of working capital was correlated to run the operation at
the minimal expenditures (Chegg, 2015). Thus, Dell gain the cost leadership advantage over their
competitors. Dell was able to minimize each component of the cost function. Cost of Dell=

∫ 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡, ℎ𝑎𝑛𝑑𝑙𝑖𝑛𝑔 𝑐𝑜𝑠𝑡, 𝑜𝑏𝑠𝑜𝑙𝑒𝑠𝑐𝑒𝑛𝑐𝑒 𝑐𝑜𝑠𝑡, 𝑐𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 𝑐𝑜𝑠𝑡,

Thus, according to the Porter model, Dell adopted the cost leadership strategy to survive and
grow in the market through minimizing the operation lever through unique supply and
manufacturing chain along with holding the proportionate profit figures.

2.2.2 Dell’s Growth in 1996

In the year of 1996, despite a huge series of financial losses in 1993, Dell was capable to reach
the milestone of 52% growth crossing the industry pace. According to the scenario, Dell increased
its sales through various strategic modifications (Porter, 2010). Sale increased due to volume
growth. At that time, Dell introduced specific corporate strategies.

a) Condensing the supply chain to improve the quality

b) Improving the technological management through involving seasoned managers for HR
expertise
c) Entering into notebook market; new product new market expansion
d) Introducing computer-based new technology of Pentium-based systems
e) Modified marketing strategies to direct channel

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Thus, Sales growth =
(𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑞𝑢𝑎𝑙𝑖𝑡𝑦, 𝑡𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑖𝑐𝑎𝑙 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦, 𝑝𝑟𝑜𝑓𝑢𝑐𝑡 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑡𝑖𝑜𝑛, 𝑚𝑎𝑟𝑘𝑒𝑡 𝑒𝑥𝑝𝑎𝑛𝑠𝑖𝑜𝑛,
∫
𝐻𝑅 𝑒𝑥𝑝𝑒𝑟𝑡𝑖𝑠𝑒, 𝑚𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑎𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔 𝑎𝑛𝑑 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔)

For attaining each variable of the sales growth, the founder had to afford huge funding for
extended market place, new product, enhanced technology as well as modified operational
activities.

Despite huge loss in 1993 along with working capital shortage, how could Dell grow 52.4% in 1996
outpacing the industry by 22%? Despite suffering from significant loss in 1993, Dell reached the
milestone of 52.4% sales growth in 1996. In this section, it will be analyzed, how this happened.
As the initial view, a company can boost sales growth, if they can increase the asset turnover or
asset utilization.

Operating asset of Dell in 1995 = (total asset – short term investment) = (1594-484) $ million =
$1110 million. As the sales of Dell in 1995 was = $3475 million, Operating asset held =
($1110/$3475) % or 31.94% of sales. If the ratio is assumed to be operative in 1996, the estimated
target operating asset level is derived. The sales stands for $5296 million in 1996. Thus, the
annual operating asset in 1996 should be = ($5296*32%) million or $1694.72 million. But, the
actual operating asset was = ($2148-$591) million = $1557 million. Required funding is = ($1557
million-$1110 million) = $447 million

From the balance sheet, it is derived that, the liability and equity side has increased in 1996
(except the payable) = {(2148-466)-(1594-403)} = $491 million. This additional $491 million was
utilized by Dell to support the required funding of $447. From the following diagram, it is clear
that dell funded the additional operating asset through both internal and external sources. Dell
mostly relied on internal sources and avoided long term debt sources to maintain solvency

Source Value Portion

Retained earnings $245.85 million 55%
Equity issuance $76 million 17%
Loan agreement $44.7 million 10%
Accruals $80.46 million 18%
.

But, how the growth happened? Well, the sales growth of 52.4% happened in three ways.

a) Firstly, Dell required less operation assets to generate the sales than the estimated, thus the
asset utilization or asset turnover has increased from 3.13 to 3.40 times, as they introduced
trendy technologies.

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b) Dell increased its equity component comparatively from the previous year in 1996.
c) Keeping the long term debt same, they increased the current assets to improve asset
efficiency.
2.2 Problem Statement
The dilemma arises, as the industry growth is probable to follow a slow trend (Csimarket, 2020).
In the second scenario, there might be potential restructure in the balance sheet. Thus, how Dell
can grow 50% in 1997? Besides, Dell has been already faced the dilemma of liquidity versus
profitability for several years. They suffered from huge loss in 1993 due to change in working
capital policy, while the policy was also not sufficiently supporting the growth.

1. As Michael Dell is assuming to outpace the industry with 50% growth in the upcoming
year 1997, what is the probable solution to support that growth?
2. What is the optimum working capital policy of Dell, balanced with the profit target?
3. If the year 1997 is entailed by repurchasing shares of $500 million and repayment of long
term debts, what would be the growth strategy for 50% estimations?
Thus, the probable problem statement could be formed as, developing working capital and
growth strategies for Dell. The growth policies should recognize two micro and macro scenarios;
restructuring the balance sheet of the company and the industry growth.

3.0 Developing Solution Alternatives

3.1 Funding Growth of 50% in 1997
Michael Dell estimated the 50% of sales growth of the company in the upcoming year of 1997.
Thus, in the upcoming year, 1997, the estimated asset would be = $7944× 29.39% =
$2334.7416. The required asset growth is = ($2334.7416-$1557) million = $777.7416 million. The
year will probably have the retained earnings of = {$7944 × ($570/$5296)} = $855 million. Thus
additional funding would be = ($855-$570) = $285 million. Or the company can sell off the short
term investment which is not operating assets, for adding the cash of $591 million. Besides, the
company can utilize the working capital portion, as they have high liquidity ratios. There available
level is = $1957-$939 million = $1018 million. Solely depending on any source would be subjected
to huge uncertainty. Thus, strategic alternatives would consider the portfolio of three sources.

Source 1 Source 2 Source 3

Retained Earnings Working capital Selling off asset portion

Required funding $778 million (approximate)
Short term yield 6.35% (estimated)
Funding Available $285 million $1018 million $591 million
Strategic alternative 1 20% 40% 40%

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 $156 million $311.2million $311.2 million
Strategic alternative 2 25% 50% 25%
$194.5 million $389million $194.5million
Strategic alternative 3 25% 25% 50%
$194.5 million $194.5 million $389 million
Strategic alternative 4 33% 33% 33%
$259 million $259 million $259 million

3.2 Recommending Alternatives of Working Capital Strategy

This aspect raises the fact that, what is the required decline in working capital to support
consistent profit. For generating alternatives, it is necessary to view the current scenario of the
balance sheet as well as the income statement. From the income statement, it is derived that,
the NPM ratio is 5.13% in 1996. But the major liquidity ratio, the current ratio stands for 2.08:1.
Thus the current asset is far higher than the current liabilities. It is wiser to reduce the ratio
toward 2:1 to balance the liquidity along with aspiring profitability. Here, three proposals are
formulated as alternatives about profit growth and working capital reduction;

Values ($million) R L UC2 LC2 UC1 LC1

Strategy 1 0.161717 0.5 0.985151 0.661717 0.885151 0.761717
Strategy 2 0.161717 1 1.485151 1.161717 1.385151 1.261717
Strategy 3 0.161717 1.5 1.985151 1.661717 1.885151 1.761717

3.3 Scenario of Capital Restructuring; Growth Funding in 1997

As per the case, there is a probable capital restructuring in two ways. The potential growth
funding opportunities may be recognized; minimizing the accounting receivables or selling assets
or supporting the growth by retained earnings level. Required asset growth for 50% sales growth
= $778 million, share repurchasing funding requirement = $500 million and long term debt
repayment requirement = $113 million. The total needed fund is = ($778 + $500 + $113) million
= $1391 million (approximately, which is required to be financed internally.

Current strategy
DSI DSO DPO CCC
Q196 34 47 42 39
Q296 36 50 43 43
Q396 37 49 43 43

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 Q496 31 42 33 40
Proposed Strategy 1
DSI DSO DPO CCC
Q197 30 40 42 28
Q297 28 40 35 33
Q397 25 38 37 26
Q497 24 35 40 19
Proposed Strategy 2
DSI DSO DPO CCC
Q197 25 20 33 12
Q297 25 20 30 15
Q397 25 20 30 15
Q497 25 20 30 15
Proposed Strategy 3
DSI DSO DPO CCC
Q197 15 25 33 7
Q297 15 25 35 5
Q397 15 25 37 3
Q497 15 25 39 1

4.0 Defining Decision Criteria

4.1 Decision Objective
The scenario states that Michael Dell is estimating the sales growth to be 50% in 1997. Thus, the
sales grow would be = (50% × $5296) = $2648 million. The projected sales figure is =
($5296+$2648) million = $7944 million. The first objective stands for achieving growth of $2648
million in internal funding scenario or only current funding scenario.

The second objective stands for evaluating and recommending the optimum working capital and
profitability policies.

4.2 Current Strategy Analysis

4.2.1 Working Capital Strategy
It is not wise to move forward without keeping an analyst eye on Dell’s current working capital
strategy (Beaumont, 2009). As per the data of the fourth quarter of 1996, Dell has significantly
lowered the cash conversion cycle to 40 days, which was 48 days in 1993. This is great for the
company. The lower cash conversion cycle means that they require less time barrier to convert
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cashes. The cash conversion has become so quick that, there is a probable excess surplus, which
may hinder the profitability. In the following diagram, it is depicted that in 1996, Dell has
significantly increased its cash balance and boosted the liquidity, which is more than enough of
their quarterly need. Besides, their balance sheet shows the beginning current ratio was 2.08: 1
which more than enough was. The quick ratio stands 1.48: 1, which is also far above the standard
balance. Dell is storing 48% over liquidity, which must be added to the investment line.

The daily cash holding of Dell is derived to be $6.60 million recently (1996), which is far above
the expected balance.

4.2.2 Financing Strategy

After observing the financial statements of Dell, the three financing strategies are derived, which
they follow:

a) Dell’s current assets are twice than current liabilities, thus they don’t depend on current
liabilities only, rather match the most liabilities with current assets.
b) Dell’s asset structure is based on current assets. And liability is very lower than the equity.
This means Dell is focused on internal funding mostly for solvency assurance.
c) Dell is using equity financing to support the fixed asset and the majority of current assets.
And the little figure of current asset is being invested in short term investments, their
strategy is currently very conservative (Danielson, 2011).
4.2.3 Profit Scenario
It was previously analyzed that, Dell has achieved a net margin of almost 5% in 1996, but their
profitability is hampered in three ways.

a) As they follow conservative working capital strategy, they hold 48% higher liquidity, if
those are invested in short term funds, there would be approximately 48% higher non-
operating income, which figure is very trivial in current balance sheet.
b) If the equity funding was transformed to debt funding, there would be less after-tax
expenses for rising profit figure (Daly, 2002).
c) The equity structure is common stock-based, ignoring the preferred stock, yet the
preferred stock may avoid excess financial outflow.
4.3 Decision Dimensions
For evaluating internal financing problem in 1997, alternatives would be analyzed through risk,
liquidity, and solvency and profitability dimensions. Especially the opportunity cost would be
incorporated in profit analysis. The relative analysis would provide the optimum alternative. For
working capital strategy, the cash forecasting would be used for getting the optimum cash
balance (Day, 2016). The excess cash would be invested for profit purpose, which will lower the
working capital. The alternative providing the highest return incorporating transaction cost is the

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optimum. The cash balance target will be based on the stone model and the investment schedule
will follow the Beranek model. Finally, the restructuring scenario will be dealt with the optimum
alternative which provides the highest incremental revenue figures.

5.0 Analysis and Evaluation of Alternatives

5.1 Evaluation of Internal Financing Alternatives
The vital query is what should be the internal financing strategy regarding 50% sales growth in
1997. The current sales in 1996 is = $5296 million. On the contrary, the operating asset is =
($2148-$591) million = $1557. Thus, asset is = ($1557÷$5296) = 29.39% of sales.

Attribute Strategic alternative

1 2 3 4
Opportunity cost {(retained $29.66 $24.70 $37.05 $32.89millio
earnings + security selling off)× million million million n
6.35%}
Current ratio 1.75:1 1.67:1 1.88:1 1.81:1
Quick ratio 1.45:1 1.25:1 1.66:1 1.45:1
D/E Ratio 1.066243:1 1.104843:1 1.104843:1 1.176176:1
Risk and uncertainty Moderate High Low Low
Net profit reduction (selling of $19.76 $12.35 $24.70 $16.45
short term investment× 6.35%) million million million million

5.2 Recommendations for Working Capital Strategy

As per the stated scenario and financial statements of Dell, it is evaluated distinctively that, Dell
is a highly liquid and solvent company currently.

Even, the working capital policy was the mainstream competitive advantage of Dell from the
beginning (Hutchison, 2007). But, despite raising the sales, the net profit lags than the
competitors. A projection of cash in the upcoming year is represented in the following section.

5.2.1 Cash Forecasting; Working Capital Perspective

January, 1997 February, 1997 March, 1997
Cash receipts ($million) 285.9546 628.5955 691.455
Cash disbursement ($million) 381.6125 595.4498 654.9948
NCF -95.6579 33.14569 36.46026

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 Beginning balance 198.1241 102.4662 135.6119
Total Cash Holding (forecasted) 102.4662 135.6119 172.0721
Daily cash holding (Approximate) 3.31 4.84 5.55
Currently, the daily cash holding target of Dell stands for $ 6.60 million. But as per the projection,
the daily holding would probably be much lower.

5.2.2 Investment Strategy; Working Capital Perspective

Modifying the cash holding would be the working capital strategy for Dell. Here, the Stone model
would be used for formulating working capital strategy (Winterton, 2013).

Daily investment fund freeing schedule

($million) January February March
Cash balance 3.30536 4.84328 5.550713
Strategy 1 2.320209 3.85813 4.565562
Strategy 2 1.820209 3.35813 4.065562
Strategy 3 1.320209 2.85813 3.565562

5.2.3 Evaluation of Investment Strategies; Profit Perspective of January

Attributes ($million) Strategy 1 Strategy 2 Strategy 3
Daily fund available 2.320209233 1.820209233 1.32020923
Monthly Investment fund (y) 71.92648624 56.42648624 40.9264862
n* 96 85 72
Revenue 0.0052887 0.00414335 0.00299895

Profit from investment 0.005233 0.004094 0.002957

5.2.4 Analyzing Effect on Net profit

($million) January February March Quarterly profit Profit (annual) Profit (%)
Strategy 1 0.005233 0.00789 0.002657 0.015780394 0.063121576 0.000232
Strategy 2 0.004094 0.006859 0.002765 0.01371819 0.054872759 0.000202
Strategy 3 0.002957 0.005829 0.002872 0.011657411 0.046629643 0.000171

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5.3 Financing Sales Growth in 1997; Capital Restructuring Perspective
This segment considers significant financing dilemma. The year is estimated to grab minimum
6.00% net margin for Dell, the retained earnings is available for $476.64 million.

Attributes ($million) Strategy 1 Strategy 2 Strategy 3

Funding available from working 796.8222 1588.8 2011.158
capital freeing up (annual)
Required funding 1391
Surplus/deficit (594.1778) 197.8 620.158
Source 2 contribution (RE) 476.64 0 0
Surplus/deficit (117.5378) 197.8 620.158
Short term investment 117.5378 (197.8) (620.158)
contribution

5.3.1 Balance Sheet Restructuring

($million) Strategy 1 Strategy 2 strategy 3

Asset growth (funded by WC) 778 778 778
RE Usage 476.64 NA NA
STI (withdraw) 4.5378 NA NA
Repurchase share 500 500 500
STI withdraw for LTD payment 113 NA NA
Long term debt payment (WC 113 113
funded)
STI growth (WC funded) (-117.5378) 197.8 620.158

5.3 2 Incremental Value Analysis

Attributes ($million) Strategy 1 Strategy 2 Strategy 3
Sales 2647.159 2647.159 2647.159
Depreciation 116.7 116.7 116.7
Opportunity cost of retained earnings (5.35%) 25.74301 NA NA
Non-operating revenue (3% annual) NA 5.934 18.60474
Incremental value 2504.716 2536.393 2549.064

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6.0 Decision Optimization and Implementation Plan
6.1 Analysis of Preferred Alternative
For three distinct scenarios of Dell Corporation, the researcher has already evaluated the
probable alternatives. The optimum alternatives are selected based on the evaluation, objectivity
and specified assumptions (Kim, 2001).

Situation Preferred Description Reasoning

strategy

50% growth 1st 20% retained earning + 40% Optimum alternative

achievement in alternative working capital + 40% short term from all attributes.
1997 sell-off

Working capital 1st Selling UC2 at $0.98 million and LC2 Contributing to NPM
policy alternative at $0.66 million by 0.0232% (highest)

50% growth with 3rd Reducing DSI and DSO by huge Highest value of
capital strategy counts, keeping DPO same $2549 million
restructuring

6.2 Solution Outlining

6.2.1 50% Growth Strategy without Restructuring

Working Capital, 311.2

Short term investment

selling off, 311.2

Retained Earning, 156

0 50 100 150 200 250 300 350 $MILLION

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6.2.2 Working Capital Strategy
Attributes Amount ($million)

Working capital (excluding short term investment) 427

Working capital including short term investment 1018

cash balance (1996) 55

Lower cash limit 0.66

Upper cash limit 0.98

Required investment 54.02

Current reduction in WC 54.02

Expected Net profit increase 0.0232%

Investment model assumptions Beranek Model

Thus, in the first quarter, the working capital reduction would be altogether almost $371 million,
which is far upper than the targeted 311.2 million, if the company goes for sales growth. This
strategy allows that Dell can free up working capital in a more flexible manner. If the current year
is ignored, the working capital reduction would be altogether $317 million. If this flow is
continued, Dell have two opportunity aspects;

1. Investing in securities for 0.0232% profit margin increase.

2. Investing in operating assets to boost sales growth (Smith, 2014).

6.2.3 50% Growth with Capital Restructuring

As per the previous recommendation about working capital strategy, the quarterly working
capital fund freeing was $321.48 million, which should be increased to $502.7895 million if the
restructuring comes into account. This can be achieved through the following schedule of DSO,
DSI and DPO.

Working capital target DSI DSO DPO CCC Implications

Q197 15 25 33 7 Reducing DSI and DSO to a

minimized standard at a time
Q297 15 25 35 5

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 Q397 15 25 37 3 along with a gradual rise in
DPO in each quarter for
Q497 15 25 39 1
capital freeing up.
Financing target Asset Short Share Loan Targeted working capital fund
growth term repo 5% freeing $2011.158 million
39% 31% 25% (annual), quarterly average
$502.7895 million

6.3 Implementation Plan

6.3.1 General Implementation Plan
What Who When Where Why How

20% 1. Asset planner Implemented Investment Affording Short-run

retained 2. Capital within portfolio, $778 investments
earning + budgeting December selling million will be
40% managers 31, 1997 strategy and asset withdrawn to
working 3. Investment cash growth some extent
capital + agents management along with
40% short 4. Fund planner modification freeing up
term sell- 5. Sales and working
off marketing HR capital. These
altogether
will finance
up to 80%.
The rest will
be funded by
retained
earnings 20%.

Setting UC2 1. Inventory From Inventory $Freeing According to

at $0.98 management December management 317 upper and
million and agent 31, 1996 system million lower limits,
LC2 at 2. Technological modification along the
$0.66 experts about with accumulated
million investment

18
 daily fund 0.0232% funds will be
planning profit rise traded for
short term
securities in
each
upcoming
month.

Reducing 1. Sales Starting from Modifying Freeing The inventory

DSI and planners January, 1997 credit $502.78 holding would
DSO by 2. Purchasing granting and million be reduced
huge agents inventory quarterly along with
counts, 3. Cash management to increased
keeping management policies support cash sales,
DPO same personnel $1391 keeping the
funding accrual
payment
similar.

6.3.2 Implementation Schedule

Without Restructuring

Task Scheduler Duration Objective

1st Task 1 Reducing cash balance 31st December Investing in short term
quarter initially by $54.02 1997 securities.
million

Task 2 Selling off short term From 1st January Equally increasing asset
investments worth 1997 to 31st base by $103.73 million.
$311.2 million March, 1997 Initial asset base will be
technologically focused.

Task 3 Freeing up $321.48 From 1st January Increasing NPM by 1.4%

million, investing in 1997 to 31st
securities March, 1997

19
2nd Task 4 Freeing up $311.2 1st April to 30th Achieving another rise in
quarter million, investing in June asset base within June.
operating assets

3rd Task 4 Retained earnings 1st November to Achieving 20% rest of asset
quarter funding of $156 million 31st December base within 1997.
1997

With Capital Restructuring

Task 1 Setting renewed 1st January 1997 Reduction of DSI

inventory level with
real-time inventory
management system

Task 2 Setting new credit 31st December Reduction of DSO

standard 1996

Task 3 Negotiating with 1st January 1997 Increasing DPO

similar accrual
payment

Task 4 Investment fund 31st January, 28th Freeing up $502.78 million

trading contract February quarterly
monthly, transactions
throughout month

Task 5 Asset base, share 30th October 1997 Funding growth by $1391
repurchase and loan million
repayment

Task 6 Investing the additional Quarterly Investing in short term

funds in short term securities by $620.158
finance million.

20
7.0 References
Beaumont, C., 2009. Cash flow forecasting. International Journal of Forecasting, 4(2), p.300.

Chegg, S., 2015. The Competitive Advantage. [Toronto]: Ontario Ministry of Industry Trade and
Technology.

Chen, X. and Tian, W., 2019. A consistent investment strategy. Journal of Investment Strategies,.

Csimarket.com. 2020. Dell Technologies Inc (DELL) Growth Rates Comparisons To Computer
Hardware Industry, Sector, Market. Sales, Income, EPS. [online] Available at:
<https://csimarket.com/stocks/growthrates.php?code=DELL> [Accessed 10 September
2020].

Daly, J., 2002. Pricing For Profitability. New York: Wiley.

Danielson, J., 2011. Financial Risk Forecasting. Chichester: John Wiley.

Day, G., 2016. GAINING INSIGHTS THROUGH STRATEGY ANALYSIS. Journal of Business Strategy,
4(1), pp.51-58.

En.wikipedia.org. 2020. Dell. [online] Available at: <https://en.wikipedia.org/wiki/Dell>

[Accessed 10 September 2020].

Hutchison, G., 2007. The Strategy Of Corporate Financing. New York: Presidents Pub. House.

Kim, Y., 2001. Advances In Working Capital Management. Oxford: Jai / Elsevier Science.

Porter, M., 2010. Competitive Advantage. New York: Free Press.

Smith, N., 2014. Alternatives in Teacher Evaluation. American Journal of Evaluation, 3(2), pp.90-
93.

William, M., 2018. Creating Tomorrow's Competitive Advantage. Washington, D.C.: Urban Land
Institute.

Winterton, A., 2013. Modelling for the future. Balance Sheet, 8(1), pp.11-14.

21
 8.0 Appendix
8.1 Working Capital Scheduling
DSI DSO DPO CCC Cogs Sales Cogs Sales
turnover turnover
(Quarter (Quarter
Cogs/90) sales/90)
Q193 40 54 46 48 391.25 728.5 4.347222222 8.094444444
Q293 44 51 55 40 391.25 728.5 4.347222222 8.094444444
Q393 47 52 51 48 391.25 728.5 4.347222222 8.094444444
Q493 55 54 53 56 391.25 728.5 4.347222222 8.094444444
Q194 55 58 56 57 610 718.25 6.777777778 7.980555556
Q294 41 53 43 51 610 718.25 6.777777778 7.980555556
Q394 33 53 45 41 610 718.25 6.777777778 7.980555556
Q494 33 50 42 41 610 718.25 6.777777778 7.980555556
Q195 32 53 45 40 684.25 868.75 7.602777778 9.652777778
Q295 35 49 44 40 684.25 868.75 7.602777778 9.652777778
Q395 35 50 46 39 684.25 868.75 7.602777778 9.652777778
Q495 32 47 44 35 684.25 868.75 7.602777778 9.652777778
Q196 34 47 42 39 1057.25 1324 11.74722222 14.71111111
Q296 36 50 43 43 1057.25 1324 11.74722222 14.71111111
Q396 37 49 43 43 1057.25 1324 11.74722222 14.71111111
Q496 31 42 33 40 1057.25 1324 11.74722222 14.71111111
AP AR Inventory WC (cash requirement) Daily Cash Balance
Q193 199.9722 437.1 173.8889 411.0166667 4.566851852
Q293 239.0972 412.8167 191.2778 364.9972222 4.055524691
Q393 221.7083 420.9111 204.3194 403.5222222 4.483580247
Q493 230.4028 437.1 239.0972 445.7944444 4.953271605
Q194 379.5556 462.8722 372.7778 456.0944444 5.067716049

22
Q294 291.4444 422.9694 277.8889 409.4138889 4.54904321
Q394 305 422.9694 223.6667 341.6361111 3.79595679
Q494 284.6667 399.0278 223.6667 338.0277778 3.755864198
Q195 342.125 511.5972 243.2889 412.7611111 4.586234568
Q295 334.5222 472.9861 266.0972 404.5611111 4.495123457
Q395 349.7278 482.6389 266.0972 399.0083333 4.433425926
Q495 334.5222 453.6806 243.2889 362.4472222 4.027191358
Q196 493.3833 691.4222 399.4056 597.4444444 6.638271605
Q296 505.1306 735.5556 422.9 653.325 7.259166667
Q396 505.1306 720.8444 434.6472 650.3611111 7.226234568
Q496 387.6583 617.8667 364.1639 594.3722222 6.604135802
(a) Account payable = Cogs turnover*DPO, (b) Account receivable = Sales turnover*DSO, (c)
Inventory balance = Cogs turnover*DSI, (d) Working capital balance = receivables + inventory –
payable, (e) Fund freeing = current working capital requirement – strategic working capital
requirement.

8.2 Restructuring Perspective; Working Capital Strategy

Strategy 1
AP AR Inventory WC (cash requirement) Daily Cash Balance
Q197 493.3833 588.4444 352.4167 447.4778 4.971975
Q297 411.1528 588.4444 328.9222 506.2139 5.624599
Q397 434.6472 559.0222 293.6806 418.0556 4.645062
Q497 469.8889 514.8889 281.9333 326.9333 3.632593
Strategy 2
AP AR Inventory WC (cash requirement) Daily Cash Balance
Q197 387.6583 294.2222 293.6806 200.2444 2.224938
Q297 352.4167 294.2222 293.6806 235.4861 2.616512
Q397 352.4167 294.2222 293.6806 235.4861 2.616512

23
Q497 352.4167 294.2222 293.6806 235.4861 2.616512
Strategy 3
AP AR Inventory WC (cash requirement) Daily Cash Balance
Q197 387.6583 367.7778 176.2083 156.3278 1.736975
Q297 411.1528 367.7778 176.2083 132.8333 1.475926
Q397 434.6472 367.7778 176.2083 109.3389 1.214877
Q497 458.1417 367.7778 176.2083 85.84444 0.953827

FUND FREE UP FROM WORKING CAPITAL ($MILLION)

Q197 Q297 Q397 Q497

2500

2000
508.5277778
1500
358.8861111
541.0222222
1000 414.875
267.4388889 520.4916667
417.8388889
500
232.3055556
147.1111111 397.2 441.1166667
0 149.9666667
Strategy 1 Strategy 2 Strategy 3

8.3 Effect of Growth Funding in 1997 (Projection)

($million) Liability Equity Short term security Profit
investment selling reduction
(6.35%)
Alternative 1 1175 1102 311.2 19.7612
alternative2 1175 1063.5 194.5 12.35075
alternative 3 1175 1063.5 389 24.7015
alternative 4 1175 999 259 16.4465

24
8.4 Cash Forecasting; 1997 1st Quarter
January February March
Sales (50% growth in quarter 1) 600 660 726
Cash sales (47.65%) 285.9546 314.5501 346.0051
AR (collection) (next month collection)
314.0454 345.4499
Total receipt (cash sales + collection) 285.9546 628.5955 691.455
Cogs (79.85%) 479.1163 527.0279 579.7307
Operating expense (13.02%) 78.17221 85.98943 94.58837
Total expenses (Cogs + operating) 557.2885 613.0174 674.3191
Cash payment (68.47%) 381.6125 419.7738 461.7512
Payable disburse (31.52%) 175.676 193.2436
Total disburse (cash payment +payable 381.6125 595.4498 654.9948
disbursement)
NCF (total receipts- total disburse) -95.6579 33.14569 36.46026
Beginning cash 198.1241 102.4662 135.6119
Total cash (NCF+ beginning cash) 102.4662 135.6119 172.0721
All proportions are derived from the geometric mean of quarter based financial ratios of the
current year.

8.5 Investment Planning

8.5.1 Stone Model Application

($million) R Lower UC2 (3R+L) LC2 (R+L) UC1 (UC2- LC1

limit 0.10) (LC2+0.10)
Strategy 1 0.16 0.5 0.985151 0.661717 0.885151 0.761717
Strategy 2 0.16 1 1.485151 1.161717 1.385151 1.261717
Strategy 3 0.16 1.5 1.985151 1.661717 1.885151 1.761717

25
8.5.2 Investment Planning Schedule

1st quarter investment plan:1997 ($million)

160

136.96686
140

108.02764
120

100

71.926479
80
54.02

60

40

20

0
31-Dec

4-Feb
7-Feb

12-Mar
15-Mar
18-Mar
21-Mar
24-Mar
27-Mar
30-Mar
2-Apr
11-Jan
14-Jan
17-Jan
20-Jan
23-Jan
26-Jan
29-Jan

3-Mar
6-Mar
9-Mar
31/1/1997
2-Jan
5-Jan

10-Feb
13-Feb
16-Feb
19-Feb
22-Feb
25-Feb
28-Feb
8-Jan

8.5.3 Stone Model Assumptions

3 0.5833
3 3𝑎𝑉 3( )1.4366
Return point, R = √ =√ 1000000
= $0.1617 million
4𝑖 4(0.0001486)

V = variance of daily cash flows from 1993 to 1996, A = transaction cost = $0.58 per million per
30 day, I = short term monthly yield = 0.0001486.

8.5.3 Fund Available for Investment

Daily investment fund freeing
($million) January February March
Cash balance 3.30536 4.84328 5.550713
Strategy 1 2.320209 3.85813 4.565562
Strategy 2 1.820209 3.35813 4.065562
Strategy 3 1.320209 2.85813 3.565562

26
8.6 Quarterly Working Capital

700

653.325

650.3611111
600

597.4444444

594.3722222
500
Cash Requirement

456.0944444
445.7944444

400

412.7611111
411.0166667

409.4138889

404.5611111
403.5222222

399.0083333
364.9972222

362.4472222
341.6361111

338.0277778
300

200

100

0
0 2 4 6 8 10 12 14 16 18
Quarters from 1993 to 1996

8.7 Financing Portfolio in 1996

18%
Retained earning
Equity issuance
10%
55% Loan agreement
Accrual
17%

27
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29
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