DELL WORKING CAPITAL - optimising inventory and Accounts receivable and payable

3. From Tab #3, you can estimate the “Net Financing Requirement” for Dell in FY1996. Why do companies, even profitable ones, need financing as they grow?

Answer:
Growing companies try to access new markets, increase the sale channel and other expanding activities. These activities require a higher investment than the company could finance only from the profit. To enter new markets successfully some initial support has to be done before the desired profit will come.
On the other hand the Net Financing Requirement is nothing negative or bad. If company would have got too much available liquidity then it would be also not profitable. The liquidity would be held and do not used efficiently. Companies in general try to finance the volatility of available liquidity also even when they are not so growing like Dell.

4. In Tab #4, why are financing requirements less than the total growth in assets? (The same issue arises in Tab #3)?

Answer:
Not just the Total Asset Increase has to be financed. There is a possibility to invest/use the achieved profit to increase a total asset of the company.

5. In Tab #5, we can see that management can reduce the amount of new investment needed by

1. Decreasing Accounts Receivable, (18)
   Obstacle is the relationship to the customers or potential customers. There more levels that are important to obtain, if company would like to change the condition of credit lines or discounts for the customer:
   - economic difficulties may prevent the borrower from repaying the account or having a reduction in credit. Companies often rely upon their accounts payable.
   - Attempts to reduce the balance could severely weaken an existing business relationship with the customer.
   - Improvements in record-keeping and customer-communications systems may decrease the own accounts receivable, but it may also cost more overhead than it at the end brings.
2. Decreasing Inventory, (22)
   There more management methods of inventory of how to optimize inventory. Dell uses already the Just-In-Time inventory. If the optimization of the JIT processes should be done then “the whole supply chain” has to be observed.
   The dependency form supply get higher and the shortages problems can happen. As the result would be a disappointed customer at the other end of the supply chain.
   The carrying costs and restocking costs should build the optimal size.
3. Increasing Accounts Payable, 22
   Supplier try, exactly like Dell, to decrease its accounts receivable. There are opposite efforts of both parties. Especially for smaller supplier it is extremely important to hold their A/Rs possibly low.
4. Increasing Margin, 7%
   In the competitive market like personal computers it is very difficult to increase margin for a company like Dell. The most possibilities to increase margin are directly in the company, internally. For example the decreasing of inventory can have an indirect impact on the better margin. It can be shown on the example of Dell and Compaq in Tab #2.

For each of the options individually (one at a time), what is the amount it must change in order to meet the entire financing need if nothing else changes? (This is determined using the answers from B(v) above.) Additionally, for each of the four possible actions, what is a key business obstacle to changing it?

6. What are the ethical implications of aggressively increasing Accounts Payable?

Answer
Small businesses are particularly vulnerable to the problems caused by late payment especially with large corporate customers who can use their market position to dictate their own payment terms. Many large firms use their small-firm suppliers as a bank – taking, what is in effect, an interestfree overdraft. (Ryan, 2008: 373)
It means that Dell should not use its strong market position very extremely at this point. Also smaller suppliers are important for Dell in case of spreading of a risk of shortages and also for the price policy of the supplier as competitors to each other. If some suppliers do not delivery under such payment conditions anymore or even become insolvent, it does not help Dell as a PC assembler in its business.