The reason for the increase islargely due to decreasing prices, love of the cloud, and addiction to apps. Case Solution Dells working capital policy, centered on inventory management, had been a competitive advantage which helped them reduce their carrying costs of inventory and minimize the risk of obsolescence of their inventory, as reflected by a low finished good to total inventory ratio. What steps do you recommend the company take? The company advertises its products directly to the consumers and assembles a computer after having received a confirmatory order from the client. It is said that case should be read two times. Please be sure to distinguish between internal and external sources of funding, and to discuss the trade-off between the uses of external funds in order to maintain high growth rates. If a business is operating profitably, then it should, in theory, generate cash surpluses.
The Proportional Liabilities projection assumes that the liabilities grow as sales grow based on the 1995 sales ratios. Do not use bullet points. For example, using Aquafina in substitution of tap water, Pepsi in alternative of Coca Cola. It also enables Dell to enjoy more fully the benefits of reductions in component prices and to introduce new products more rapidly. The company markets its computers directly to its customers and builds computers after receiving a customer order.
How much cash needs to be borrowed in the short-term? The gross margin decline was attributed to aggressive pricing strategies and an account mix shift from major accounts such as corporations and government agencies to lower margin customers such as small-to-medium businesses and consumers. The other liabilities are assumed to remain at 1996 sales ratios. In January 1996, for example, Dell had inventory to cover 32 days of sales while Compaq Computer had inventory to cover 73 days of sales. There are opposite efforts of both parties. Secondly, after identifying problems in the company, identify the most concerned and important problem that needed to be focused. The lower inventory losses for Dell imply higher profits. Rare and valuable resources grant much competitive advantages to the firm.
This shows the inefficiency of the company and theinability to convert the sales into the gross profit margin efficiently. Initial reading is to get a rough idea of what information is provided for the analyses. The company markets directly to its customers and builds computers after receiving a customer order. In addition, alternatives should be related to the problem statements and issues described in the case study. The buyer power is high if there are too many alternatives available. He was wondering how he could reduce the working capital funds requirement of his company without affecting the sales. Whereas, the opportunities and threats are generally related from external environment of organization.
It solelydepends on Laptops and Desktops in consumer market for its revenue. Value of inventory reduces 30% p. If 1995 profit margins of 4. Therefore, it is necessary to block the new entrants in the industry. Answer: Both Companies are acting on a high-tech market.
Moreover, it also helps to the extent to which change is useful for the company and also guide the direction for the change. When issuing additional shares of stock equity the value of existing traded stock is diluted in proportion and as such the current ownership might lose control and may even be voted out by shareholders if dilution is substantial enough. In quarter 4 of 1997 Dell paid its suppliers, on average, in 54 days — an increase of 64% , or 21 days, from a year earlier. Best alternative should be selected must be the best when evaluating it on the decision criteria. This build-to-order model enables Dell to have much smaller investments in working capital than its competitors.
On the asset side of the balance sheet, Dell was able to reduce cash, receivables, inventory and other current assets relative to the projections. Another method used to evaluate the alternatives are the list of pros and cons of each alternative and one who has more pros than cons and can be workable under organizational constraints. For all three assumptions, assets are based on 1996 sales ratios except for short-term investments that are held at 1996 levels. Calculate their working capital advantage. Dudovskiy, 2015 Problem identification The company is experiencing problems in the profitability, liquidity and working capital management.
The days sales outstanding are 54 days in the first quarter of 1993, whereas the days have decreased to 42 days in the last quarter of 1996 and this shows the average collection period of the company from its customers. Thus, Dell could finance substantial growth without increasing leverage of obtaining more equity. How much inventory should be kept on hand? The large disparity in the loan proposals required Frankenthal to decide which of the loan terms was most important to his success. The benefit from the debt repayment appears to be more financial flexibility and the absence of debt covenants. Overall, assets other than short-term investments fell from 32% of sales in 1995 to 29% of sales in 1996.
Students should also explore the benefits or repaying the debt and the equity repurchase. This allowed Dell to hold inventory of finished products far below levels of their competitors 10-20% compared to 50-70% industry level and furthermore allowed them to quickly implement changes to their product lines as new technologies became available. Cash flows of the company, based on the given information, comprised of changes in operating assets, changes in liabilities and equity and net income. It means for Dell that its liquidity does not have to be invested to be held in the inventory, but can be used to achieve faster growth or to do the prices of its products… Words 924 - Pages 4. It also enables Dell to enjoy more fully the benefits of reductions in component prices and to introduce new products more rapidly. Students should describe how Dell could increase its working capital efficiency. See Exhibit No 2 Working capital management The cash conversion cycle in days was around 48 days in the first quarter of 1993, whereas the cash conversion cycle became 40 days in the last quarter in 1996 this shows a good improvement.
Short-term investments are assumed to be constant. Cash flows in a cycle into, around and out of a business. If the 1996 profit margin of 5. After defining the problems and constraints, analysis of the case study is begin. With operations in four geographic areas and additional business centers and manufacturing sites in more than 20 locations around the world, Dell is able to reach more than 24,000 retail locations worldwide.