In the here-today, gone-tomorrow business of computers, speed saves. Nobody knows that better than Tom Meredith of Dell Computer Corp. Since taking the CFO position at the Round Rock, Texas-based company in 1993–a job the former treasurer of Sun Microsystems Inc. nearly rejected because of the monumental challenge–Meredith has made velocity his mantra, and liquidity improvement his personal crusade.
“I’ve always been grounded in the belief, right or wrong, that a company’s focus on cash flow has nothing but a good impact on its operating performance,” he says. So far, he’s been right. Meredith’s intense focus on liquidity improvement contributed to a return on invested capital of 154 percent in the past year alone. During the nearly five years he’s been at the company, Dell has moved from upstart to a front-runner.
Dell’s finance reengineering effort, for which it received the REACH Award for treasury operations, was born of necessity in late 1995. The company’s inventories were ballooning, accounts receivables were rising faster than its revenue growth rates, and asset management was undermined by several quarters of lackluster performance. Although revenues were growing, profitability just wasn’t where it used to be–or should be.
“Wall Street rewards companies that balance growth, liquidity, and profitability,” Meredith notes. “Ours was out of whack. We needed to take the weight off the growth pedal and shift our focus to liquidity and profitability.”
Now that Dell’s yin is in harmony with its yang, Wall Street is a convert. The company’s stock price climbed to the heavens–at one point up 200 percent in the past year–before settling a little closer to earth.
TURNING SALES INTO CASH
How did Dell doom the nay-sayers? “By motivating our employees and suppliers to focus on the purity of velocity,” Meredith replies. “We sent out a consistent message to everyone to focus on three things– asset management, return on invested capital, and cash conversion.”
Speed was of the essence. “Basically, we focused on ways to convert what we sell directly to the marketplace as quickly as possible into cash,” says Danny Caswell, manager of Dell’s asset management department.
To do that, Dell went its own way. It eschewed traditional benchmarks that focus on just one department, because its liquidity reengineering required full company participation– everyone from employees to suppliers to vendors to customers. To that end, the asset management team within Dell’s treasury department provided resources, methodology, and other tools. “We’re pleased to win the REACH Award for treasury operations, but frankly it’s a misnomer,” Meredith says. “Everyone in the organization drove this. Treasury was just the facilitator.”
DSO + DSI DPO = CCC
To determine improvements in return on invested capital, Dell’s asset management team developed a set of internal benchmarks. Metrics included days sales outstanding (DSO), days sales in inventory (DSI), and days payables outstanding (DPO). Add DSO and DSI, then subtract DPO, and you get the chief metric Dell uses to measure its liquidity: cash conversion cycle (CCC). “These were metrics we felt people at the line level could understand and act upon,” explains Caswell.
The metrics tell a compelling tale. Since booting up its liquidity management program in the fourth quarter of 1996, Dell’s cash conversion cycle has gone from an acceptable 40 days to a phenomenal minus-5 days in the fourth quarter of 1997.
“Our biggest improvement was in the inventory area, which we drove down from 30-plus days to 13 days,” Caswell says. “We analyzed key inventory drivers to identify who was holding inventory and where. It turned out to be us almost exclusively. We realized our vendors could hold most of the inventory instead, and we made the changes necessary to accomplish just that.”
Reduced inventory levels translate into customer advantages, says Jeffrey Krisel, Dell’s former director of asset management and now controller of Dell Financial Services. “If we’re carrying inventory 12 days while our competitors and their retailers are carrying inventory for 50 days, consumers are given a choice between 12-day-old technology and 50- day-old technology,” Krisel explains.
SHORTER RECEIVABLES, LONGER PAYABLES
Improved inventory cycles were just part of the CCC turnaround. DSO was pared from an already-respectable 42 days to 37 days over the one-year period. What did the trick? New collections tools provided to Dell’s customer financial services department to improve order processing and collection activities. “We customized collections software made by a firm called Get Paid that provides information about why customers aren’t paying their bills,” Caswell says.
Dell also was able to make similar headway in the DPO metric, which increased from 33 days to 54 days. “We were often paying our bills before the negotiated terms,” Caswell recalls. “Why? Because we weren’t paying attention. We weren’t sufficiently aware of the receiving date versus the paying date and the time lag in between. We’ve maximized this time difference now, which has expanded our DPO significantly.”
Meredith is convinced the cash conversion cycle improvements have a direct correlation to Dell’s stock price. “As we reduced our CCC and increased velocity, our stock price has had an extraordinary rise,” he says. “Shareholders are valuing our ability to grow the company and generate cash at the same time–without going to lenders. We’ve even bought back a significant number of our shares in the first half of the year, meaning we have shrunk the share base and still funded this tremendous growth.”
SPREADING THE GOSPEL
In early 1996, Dell’s asset management team launched a series of what ultimately became more than 100 presentations to educate company employees about the importance of liquidity management. “Most people believed–erroneously- -that they didn’t have much effect on the asset management metrics,” Caswell recalls. But this belief was easily dispelled. If, for example, the company could simply reduce the errors made in processing sales orders, the number of merchandise returns would be correspondingly reduced, and liquidity would be improved.
With the skepticism allayed, the team asked questions, starting with the big one: What is causing our liquidity to be what it is, and how can we fix it together? “Everybody had so many ideas for improvement that we just basically oversee things now,” Caswell says. “It’s fair to say that this entire reengineering effort was built from the bottom up.”
And the effort will be ongoing, promises Meredith. “There’s no finish line,” he says. “Success is never final.”
For a snapshot on the best practices and key metrics data for treasury operations click here.
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