Dell manufactures, sells, and services personal computers. The company markets directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investments in working capital than its competitors. It also enables Dell to enjoy more fully the benefits of reductions in component prices and to introduce new products more rapidly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability.
Dell’s Competitive Advantage:
The extent of Dell’s working capital advantage over its competitors can be assessed using data contained in Table A …show more content…
Exhibit TN-3 highlights how Dell funded it 1996 growth by comparing the actual balance sheet with the projections in Exhibit TN-1. On the asset side of the balance sheet, Dell was able to reduce cash, receivables, inventory and other current assets relative to the projections. DSO (days sales outstanding) improved by 5 days over the prior year as accounts receivable balance as a percent of sales dropped from 13.7% from 15.2%. Inventory levels as a percent of sales also decreased slightly as DSI (days sales in inventory) improved by 1 day to 31 days from 1995 end. Overall, assets other than short-term investments fell from 32% of sales in 1995 to 29% of sales in 1996. As a result of the improved asset efficiency, Dell increased its short-term investments by $107 million and decreased current assets by $30 million.
On the liability side of the balance sheet, Dell increased its current liabilities by $187 million. That increase was $207 million less than the increase that would have occurred with a proportionate increase in current liabilities. As a percent of sales, current liabilities fell from 21.6% in 1995 to 17.7%. Accounts payable was 8.8% of sales, a decrease of nearly 3%. In fact, during Q4 1996, Dell paid its suppliers 11 days