Question 19.1: The following information is from Dell’s 2012 income stateme...
The following information is from Dell’s 2012 income statement and balance sheet (numbers are in $ millions). Use it to compute Dell’s cash conversion cycle.
| Sales | 56,940 |
| Cost of Goods Sold | 44,754 |
| Accounts Receivable | 9,842 |
| Inventory | 1,382 |
| Accounts Payable | 15,223 |
PLAN
The CCC is defined in Eq. 19.1 as Inventory Days + Accounts Receivable Days – Accounts Payable Days.
Thus, we need to compute each of the three ratios in the CCC. In order to do that, we need to convert Sales and COGS into their average daily amounts simply by dividing the total given for the year by 365 days in a year.
The cash conversion cycle (CCC) is defined as:
CCC = Inventory Days + Accounts Receivable Days – Accounts Payable Days (19.1)
EXECUTE
Average Daily Sales = Sales/365 Days = 56,940/365 = 156
Average Daily COGS = COGS/365 Days = 44,754/365 = 122.61
Inventory Days = \frac{Inventory}{Average Daily Cost of Goods Sold} =\frac{1382}{122.61} =11.27
Accounts Receivable Days = \frac{Accounts Receivable}{Average Daily Sales } =\frac{9842}{156} =63.09
Accounts Payable Days = \frac{Accounts Payable}{Average Daily Cost of Goods Sold } =\frac{15,223}{122.61} =124.16
Thus, Dell’s CCC = 11.27 + 63.09 – 124.16 = -49.80!
EVALUATE
Dell actually has a negative cash conversion cycle, meaning that it generally receives cash for its computers before it pays its suppliers for the parts in the computer. Dell is able to do this because its combination of direct sales to the consumer (it charges your credit card as soon as you order) and sales through retailers keep its receivables low. Due to its size and bargaining power, its suppliers allow it to wait 124 days before paying them!