Case study on: Bajaj Auto-Evaluating the

Working Capital Requirements

Submitted to:
Prof. Gita Madhuri
Submitted by:
Avisek sarkar
Roll no: 16
Batch -17

Abstract:
The main objective of this Case study on Bajaj Auto-Evaluating the Working Capital
Requirements is to understand the need and significance of investing in current assets and
recognizing the advantage of effective working capital management on companys long-term
profitability also strengthens the companys liquidity position. Cash is the core component of a
business and if the level of such resource is unsatisfactory, the companys ability to fund
operations, reinvest and meet working capital requirements may get affected. A good way to
judge a firms cash flow prospects is to look at its working capital management. In other words,
improving working capital performance increases a companys competitiveness by increasing its
return on capital employed. The case study attempts to explain the necessity of working capital
management and discusses as to how the nature of industry impacts the working capital
requirements of a company.
Considering the Indian auto industry, the case study gives a brief presentation of financial
statements of Bajaj Auto and highlights the working capital trends of the company. As inventory
management is a crucial part of working capital management, affective management of working
capital results in better performance of working capital.
The case study focuses on the various approaches of estimating the working capital
requirements.

Objectives:
To understand the need and importance of investing in current assets and its implication
on companys long-term profitability and maintaining liquidity.
To identify the necessity of Working Capital Management (WCM) with the reference of
WCM of Bajaj Auto.
To determine the working capital requirement of Bajaj Auto using different approaches.

Q.1

What is the need and importance of current assets and its implications on companys long-term
profitability?
Ans.
There are two forms of financial resources in every organization long-term resources for
investing and purchase of fixed assets and sustainability and short-term resources is to run the
day-to-day operations (working capital) like purchase of raw material, payments, etc. The capital
which is required to operate routine business activities is termed as working capital. It deals with
the short-term resources i.e. current assets and current liabilities,
Current assets represent assets that can be quickly transferred into money. Some of them are:

Cash
Cash equivalents
Inventories
Accounts receivable (these are the money that customers owe to the company for services
or products provided)

Current liabilities represent the short term obligations of the company. Some of them are:

Accounts payable
Short term debt

Current assets and current liabilities should be compared over periods of time. It is good if the
current assets have increased significantly over longer periods of time. This means that the
company generates cash. On the other hand, it can be also interpreted as the company not being
able to collect the money it has to take from its accounts receivable. If the current liabilities of
the company are growing at a fast pace, then there might be some problem with the company.
However, this is not always bad since the company may incur higher liabilities since it needs
money to finance some of its goals
The main reason behind people looking at balance sheet more keenly is to find out a companys
working capital (or liquidity) position. It reveals more about the financial performance of a
company in comparison to any other calculations. It discloses the financial position of a
company, when it raises short-term loans to pay off its current obligations/liabilities.
Adequate working capital will help in smooth functioning of business operations. Management
of current asset is similar to the management of fixed asset as both are based on risk and return
basis, in which firms analyse their effects on risk and return basis. However, current assets and
fixed assets differ in three important ways:
1. Time factor: As fixed assets are the permanent assets of the company, time plays a vital role in
fixed asset management. Hence discounting and compounding techniques are applied in the

assessment and management of fixed assets. Where as, current assets are temporary assets of the
company and can be converted into cash within a years time and hence time is not an important
factor in the management of current assets
2. Risk-return trade off: This is very crucial for the management of current assets, as large
holding of current assets, especially cash, though strengthens the firms liquidity position, lies
idle. There is an opportunity cost associated with the amount of cash to be maintained by the
company and a lot of risk involved if enough cash is not maintained. Whereas in case of fixed
assets, there is no calculation of risk-return trade off as most of the fixed assets are used in the
manufacturing process of the company
3. Dependence on level of sales: Both, current and fixed assets depend upon expected level of
sales, but it is only current assets which are adjusted with sales fluctuations in the short run.
However, a business concern should ensure that it should have adequate working capital, because
excess/redundant or inadequate/shortage working capital may prove disadvantageous to the
enterprise
EXCESSIVE AND INADEQUATE WORKING CAPITAL:
A business enterprise should maintain adequate working capital according to the needs of its
business operations. The amount of working capital should neither be excessive nor inadequate.
If the working capital is in excess if its requirements it means idle funds adding to the cost of
capital but which earn no profits for the firm. On the contrary, if the working capital is short of
its requirements, it will result in production interruptions and reduction of sales and, in turn, will
affect the profitability of the business adversely.
Disadvantage of Excessive Working Capital:(1) Excessive Inventory:- Excessive working capital results in unnecessary accumulation of
large inventory. It increases the chances of misuse, waste, theft etc.
(2) Excessive Debtors:-Excessive working capital will results in liberal credit policy which, in
turn, will results in higher amount tied up in debtors and higher incidence of bad debts.
(3) Adverse Effect on Profitability:-Excessive working capital means idle funds in the business
which adds to the cost of capital but earns no profits for the firm. Hence it has a bad effect on
profitability of the firm.
(4) Inefficiency of Management:-Management becomes careless due to excessive resources at
their command. It results in laxity of control on expenses and cash resources.
Disadvantage of Inadequate Working Capital:

(1) Difficulty in Availability of Raw-Material:- Adequacy of working capital results in nonpayment of creditors on time. As a result the credit purchase of goods on favorable terms
becomes increasingly difficult. Also, the firm cannot avail the cash discount.
(2) Full Utilization of Fixed Assets not Possible: Due to the frequent interruption in the supply of
raw materials and paucity of stock, the firm cannot make full utilization of its machines etc.
(3) Difficulty in the Maintenance of Machinery: Due to the inadequacy of working capital,
machines are not cared and maintained properly which results in the closure of production on
many occasions.
(4) Decrease in Credit Rating: Because of inadequacy of working capital, firm is unable to pay
its short-term obligations on time. It decays the firms relations with its bankers and it becomes
difficult for the firm to borrow in case of need.
(5) Non Utilization of Favorable Opportunities: For example, a firm cannot purchase sufficient
quantity of raw materials in case of sudden decrease in the prices. Similarly, if the firm receives a
big order, it cannot execute it due to shortage of working capital.
(6) Decrease in Sales: Due to the shortage of working capital, the firm cannot keep sufficient
stock of finished goods. It results in the decrease in sales. Also, the firm will be forced to restrict
its credit sales. This will further reduce the sales.
(7) Difficulty in the Distribution of Dividends: Because of paucity of cash resources, firm will
not be able to pay the dividend to its shareholders.
(8) Decrease in the Efficiency of Management: It will become increasingly difficult for the
management to pay its creditors on time and pay its day-to-day expenses. It will also be difficult
to pay the wages regularly which will have an adverse effect on the morale of managers.

Management of Working Capital:

Working capital management policies of a firm have a great influence on the profitability,
liquidity and structural health of the organization. Working capital management is three
dimensional in nature:
(i) Formulation of policies with regard to profitability, risk and liquidity
(ii) Decisions about the composition and level of current assets
(iii) Decisions about the composition and level of current liabilities.

Q.2
Explain the need for Working Capital Management (WCM) and analyze the Working Capital
trend of Bajaj Auto Ltd.
Ans.
The need for Working Capital Management (WCM):
There are two concepts of working capital gross working capital and net working capital. Gross
working capital refers to the firms investment in current assets (assets which can be converted
into cash within an accounting year. For example, cash, short-term securities, debtors bills
receivable and stock). The difference between current assets and current liabilities can be termed
as net working capital. There can be a negative working capital or positive working capital. A
negative working capital occurs when a companys current liabilities exceed current assets or
which means that the company is unable to clear off its current obligations on due date. When
current assets exceed current liabilities, it can be termed as positive working capital.
For example, a biscuit manufacturing firm uses $100 to build up its inventory of sugar, wheat,
edible flavors, etc. A week later, it produces and ships it out and the customers may make
payment ($100) after a week. The $100 has been blocked for 2 weeks is the companys working
capital. Faster the company can sell its products, sooner it can purchase fresh raw material,
which helps in running its production cycle. If the stock sits idle, cash is tied-up and can prove
hurdle for business expansion. Therefore, excess or deficient working capital, both can prove
risky to the business. Therefore better management of working capital leads to less borrowings
for the company. Even firms with sufficient or excess cash flows need to manage their working
capital effectively and ensure that surplus working capital is invested in better ways to generate
maximum returns. Working capital management refers to the management of all the components
like cash, marketable securities, receivables and payables, etc., which are short-term in nature.
The main purpose of working capital is to determine the level and composition of current assets
and to ensure that the current liabilities are paid off on time. As such, it depends on the nature of
the industry and companys size as to what amount of working capital should be maintained by
the company. However there are some ratios which can be used to estimate the working capital
requirements.

Working Capital trend of Bajaj Auto for Financial Year (20052009)

Q.3
Estimate the working capital requirements of Bajaj Auto Ltd. using different approaches.
Ans.
Ratio to sales method:
To estimate working capital requirement as a ratio of sales on the assumption that current assets
change with sales.
Calculation for Average sales growth:
2006-2007
growth
% change
avg

2007-2008

2008-2009

20442.1

-9071.7

-6338.3

23.89%

-8.56%

-6.54%

2.93%

So, It is assumed that in FY 2010, increase in sales is 2.93%%. Hence, the sales in FY 2010 is
90587.5 102.93% = 93243.42451 million
Calculation for average current assets to sales ratio:

Particulars

2007

2008

2009

105997.5

96925.8

90587.5

47107.9

16680.5

23019.2

Percentage Current assets to Sales

44.44%

17.21%

25.41%

Average (%)

29.02%

Sales
Current assets

Therefore, the amount of working capital requirement is 29.02% of sales (2010), INR 93243.42
million, which is INR 27060.18 million.