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Assuming Dell Sales Will Grow 50% in 1997, How Might The Company Fund Its Growth Internally?

Dell's sales are projected to grow 50% in 1997. The document analyzes Dell's cash flows to determine if it can fund this growth internally. It finds that in 1997, as in prior years, Dell's internal sources of cash from net income and increased equity and liabilities will be sufficient to fund the projected 50% sales growth, totaling $1.249 billion in cash inflows compared to $779 million in cash outflows for increased operating assets.

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480 views1 page

Assuming Dell Sales Will Grow 50% in 1997, How Might The Company Fund Its Growth Internally?

Dell's sales are projected to grow 50% in 1997. The document analyzes Dell's cash flows to determine if it can fund this growth internally. It finds that in 1997, as in prior years, Dell's internal sources of cash from net income and increased equity and liabilities will be sufficient to fund the projected 50% sales growth, totaling $1.249 billion in cash inflows compared to $779 million in cash outflows for increased operating assets.

Uploaded by

Divya
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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3.

Assuming Dell sales will grow 50% in 1997, how might the company
fund its growth internally?
To determine the source of funding for 1997, we only need to analyze major cash
flows, rather than breaking them down in terms of operating, investing and financing
activities. Only debt financing is considered to be external funding. Accounts
payable, can also be considered as external funding, since creditors are considered
to be external entities, so they are excluded from the analysis. Moreover, in this,
change in equity is being considered as injection from sponsors only, making it to be
an internal source. 
Assumptions that we need to undertake include constant net profit margin (net profit
as % of sales) of 5.136% and operating assets, as percent of sales, of 29.40%. In
the absence of any non cash charges, such as depreciation, and other information
net income and increase in Equity & Liabilities are accounted for as the only cash
inflows.
As per the analysis in the attached excel sheet, net profit after tax amounted to USD
408 million whilst change in total operating assets amounted to USD 779 million.
After accounting for Equity & Liabilities, cash inflows would amount to USD 1,249
million whereas cash outflows, increase in operating assets, amounted to USD 779
million. This reflects that in 1997 also, internal sources would be sufficient to fund the
growth of the company.

4. How much working capital need to be reduced and/or profit margin


increased?
Reducing working capital would free up tied up cash in excess inventory, will result in
reduced trade debts and lower cash balance. In order to determine a precise
estimate of the value by which working capital need to be reduced, we need to
estimates for Days Sales of Inventory, Days Sales Outstanding, Days Payable
Outstanding and Cash Conversion Cycle for the industry.
As per the calculations in the attached excel sheet, working capital grew more than
52%, which is the growth of sales. Taking into account the growth of 52%, working
capital in 1996 should have been USD 356 million, as compared to current working
capital level of USD 427 million, reflecting that the working capital may be reduced
by USD 71 million. This depicts that Dell is lacking in terms of effective utilization of
assets.
As an alternative, rather than decreasing investment in working capital, Dell can also
increase their profit margin. More than required investment in working capital
resulted in an outflow of USD 71 million. However, by an increase in after tax profit
by USD 71 million, its effect would then be nullified. In summary, Dell can wither
reduce their working capital investment by USD 71 million, or increase profit margin
by the same amount. 

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