Business Risk Evaluation for Dell Computer Corporation

For the fiscal year ending February 2008, Dell’s net revenue totaled $61.1 billion, and its net income was $2.9 billion. The company’s total assets valued $27.561 billion, with cash and equivalents making up the largest portion, which totaled $7.764 billion. The company’s cash flow in operating activities was $3.949 billion, and had approximately 88,200 total employees, including around 82,700 regular employees and 5,500 temporary employees.

PRODUCTS:

Dell offers a broad range of products, including innovative technology and services that consists of desktop PC’s servers and networking products, storage, mobility products, software and peripherals and services. Desktop PC”s remains the main source of revenue: 32.0% of net revenue. This is a 1.2% decrease from 2007, preceded by an 8.1% decrease from 2006. As the revenue from desktop PC’s was decreasing, sales from mobility products rose. The revenue from mobility products made up 28.5% of the net revenue. This is a 12.6% increase from 2007, preceded by a 7.7% increase from 2006.

EXTERNAL BUSINESS FORCES

COMPETITORS

Dell’s current direct competitors include Hewlett-Packard, Lenovo, IBM, Gateway, Apple, Acer, CDW, EDS, EMC, Software House International, Insight (software spectrum), Softchoice and Digital River. In 2007, Dell lost 1.9 points of share due to the competitive environment. The company lost share in the U.S. and internationally because their growth did not meet overall PC systems growth. This was mostly due to strong competitive pressure in their lower priced desktops and notebooks. There was also a slight reduction in Dell’s international desktop shipments, compared to 5% increase in the worldwide desktop industry. At the end of calendar 2007, the company continued to be the top supplier of personal computer systems in the U.S. and the number two supplier worldwide.

CUSTOMERS

Dell’s customers consist of small-to-medium businesses and individuals, large corporations, healthcare, government, and education accounts. The company’s customer base come from the five key areas it has focused to develop its growth strategy:

Small and medium business: striving to provide better IT solutions

Enterprise: striving to become industry leader in simplifying information technology for consumers,

Global consumers: striving to provide better and broader markets global sales growth

Emerging countries: striving to achieve an increase in investments and growth.

Notebooks: striving to reclaim notebook leadership,

SUPPLIERS

Dell purchases a number of components from a limited number of sources. Dell will establish a working relationship with a single source or a limited number of sources if they believe it is beneficial due to performance, quality, support, delivery, capacity, or price. A high volume of quality components from third-party suppliers is needed for Dell’s manufacturing process. Any defective supply can decrease product reliability and hurt the company’s reputation. Dell’s reliance on suppliers makes them susceptible to industry shortages and less control over delivery schedules. Dell continues to develop its inventory and manufacturing business model to benefit from component cost declines. The company also negotiates with our suppliers in a variety of areas: availability of supply, quality, and cost. These continuous supplier negotiations maintain Dell’s ability to respond quickly to changing market conditions. The efficient supply chain management reduced inventory risk through the mutually beneficial purchase arrangements with suppliers.

LABOUR

At the end of Fiscal 2008, we had approximately 88,200 total employees, which is a decrease from approximately 91,500 total employees at the end of Fiscal 2007. In the first quarter of Fiscal 2008, Dell started an assessment on costs, from product development and procurement through service and support delivery. The company’s goal was to simplify structure, remove redundancies, and improved align operating expenses. As a result, the company expects to further decrease headcount, exclusive of additions due to acquisitions.

MARKETING AND DISTRIBUTION ANALYSIS:

Dell markets their products to small-to-medium business and consumers mainly by dedicated sales representatives, telephone based sales, television and online at www.dell.com, a variety of print media like catalogs and customer newsletters, and through a variety of indirect sales channels. Dell sells indirectly through selected partners to gain from the partner’s existing customer relationships and important knowledge of conventional customs and logistics in the country, to mitigate credit and country risk, and since sales in certain countries may be too small to warrant a direct sales business unit. In the U.S, the company sells indirectly through third-party solution providers, system integrators, and third-party resellers. During Fiscal 2008, Dell has also begun selling selected products in retail stores in several countries in the Americas, EMEA and APJ.

BUSINESS STRATEGY:

The business strategy that Dell utilizes is cost leadership as the company’s objective is to offer their products at the lowest cost among major competitors. The company’s business strategy combines its direct customer approach with a highly efficient manufacturing and supply chain management organization with an emphasis on the use of standards-based technologies. This strategy enables Dell to provide customers with superior value; high-quality, relevant technology; customized systems and services; superior service and support; and differentiated products and services that are easy to buy and use. Dell maintains the lowest cost structure among major competitors. The company then passes those savings on to customers. Recently, Dell has begun to follow a targeted acquisition strategy intended to expand certain areas of its business with more products, services, and technology. Their recent acquirement of EqualLogic, Inc., a leading provider of high-performance storage area network solutions, and the following development of Dell’s PartnerDirect channel are aimed to bring consumers an easier and more affordable solution for saving and processing data.

BUSINESS PROCESSES:

Dell manufactures many of their products internationally. The company has manufacturing locations worldwide to satisfy their global customer base. They have relationships with third-party innovative equipment manufacturers that produce some of their supplies to the precise specifications. The company also extended the use of inventive design manufacturing relationships and manufacturing outsourcing relationships to generate cost efficiencies, deliver products faster and provide better customer service. Their manufacturing processes and supply-chain management techniques provides them with a competitive advantage. Dell customers can purchase systems and services from Dell via telephone, at retail stores, and through their website. Customers can also review, configure and price systems within Dell’s product line on the website.

ACCOUNTING INFORMATION:

Dell maintains an efficient asset management system in comparison to their major competitors due to their direct business model. The model allows the company to minimize inventory risk while collecting amounts due from customers before paying vendors. This allows Dell to generate annual cash flows, which are usually greater than net income, from operating activities. Table 2 in the Appendices shows Dell’s keeps track days of sales outstanding, days of supply in inventory, and days in accounts payable. The company can utilize this information to calculate their cash conversion cycle, which allows Dell to measure their performance of cash flow. Dell defers their cost of revenue related to customer shipments that have not been recognized yet as revenue until they are delivered. The company includes the deferred costs in their reported DSO because they believe that it will result in a more accurate presentation of their DSO and cash conversion cycle.

ACCOUNTING METHODS:

Dell follows the guidelines and standards provided by GAAP in producing their financial statements. Revenue is recognized based on management’s judgment, creating a potential risk for misstatement since the figures may be bias or manipulated by management. Another potential risk related to revenue is bad debt expenses. As sales rise, the risk of bad debt expense increases. This number is also an estimate that can be manipulated by management. Dell uses the acquisition method to record the acquisition of assets and liabilities. This utilizes fair value, which relies on estimates and professional judgment, resulting in potential risk. Dell uses the accrual basis to record the sales for the whole period of the contract for contracts sales.

RISK OF MATERIAL MISSTATEMENT

Dell has some misstatement regarding to some of its accounting and financial reporting matters during the Fiscal year of 2008. The i investigation completed by the audit committee, with the consultation from management and PricewaterhouseCoopers LLP, its independent registered public accounting firm, concluded on August 13, 2007 that the financial statements for Fiscal 2003, 2004, 2005, and 2006, and the first quarter of Fiscal 2007, should no longer be used due to certain accounting errors and irregularities in those financial statements. Dell identified several deficiencies in internal control over financial reporting, including control environment and period-end financial reporting process. The control deficiencies failed to detect a number of accounting errors and irregularities.

BUSINESS RISK:

An auditor’s goal is to understand the Business Risks involved with an entity is so that the auditor can use it to assess the risk of the financial statements. The auditor and audit team can recognize what can be erroneous at the financial statement level. By understanding the business risks involved, the auditor can plan an effective audit program that addresses all the important/material risks of the financial statement misstatements.

An auditor does not have responsibility to recognize or assess all business risks since it is usually not an auditor’s goal. An auditor’s main objective is to obtain reasonable assurance that the financial statements are free of material misstatement. If the auditor can recognize any material business risks they will communicate back to the users. For example, if the vendor goes bankrupt Dell loses its main source inventory, a manufacturing business like Dell relying on one vendor for its main supplies.

References:

http://www1.ca.dell.com/content/topics/global.aspx/about_dell/company/main/company?c=ca&l=en&s=corp

http://www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it06143.html

http://cga.ct.gov/apa/goals.htm