Working Capital Management Truthbehindcurtain

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Working Capital Management: Truth behind curtain
Article · April 2016
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INTERNATIONAL RESEARCH JOURNAL OF MULTIDISCIPLINARY
STUDIES
Vol. 2, Issue 4, April, 2016 ISSN (Online): 2454-8499 Impact Factor: 1.3599 (GIF)
0.679 (IIFS)
Working Capital Management: Truth behind curtain
Lt. Prof. Yashodhan P. Mahajan,

Head- Department of Accountancy,
BMCC, Pune
Abstract
The working capital management (WCM) is a mesmeric term, which makes the ears awake.
Financial experts look at the WCM as a basic tool of status analysis. Smartness of the WCM lies
in professional management of liquidity, profitability and leverage of an organization truly, if not
ethically manipulated. Working capital management is always a gray or mysterious area where
companies try to hide their factual financial business aspect.
Key Words
Working capital management, liquidity, profitability, leverage
Introduction
Significant changes that have taken place for few decades have resulted in potential for better
decision in business. Unfortunately, such development has not been consistent throughout all
parts of economic decision making in and around business organizations. Working capital
management appears to be relatively neglected in spite of the fact that a high proportion of the
business failures is due to poor decisions concerning the working capital of the firms (Smith,
1980). In an ideal economy, there would not be a need to have working capital since, the market
conditions are planned and there is very less chance of uncertainty. Naturally, there would not be
transaction costs, setting up costs, cost of production etc. Ultimately cost per unit of produce will
be uniform irrespective of production. Business will lend and borrow at a uniform interest. Cost
of all the factors of production will be determined by market trend, indirectly there would be
perfect competition in the economy.
Objectives
1. To Study the Working Capital Management
2. To Study Working Capital Management of Bajaj Auto as a Case Study
3. To Study Sources of Funds for Working Capital
Research methodology
Researcher follows case study method. This research article is based on secondary data.
Appealing facts and figures are taken out from the authorized website and related sources
regarding financial operation of the company. For this research work a company “Bajaj Auto
Ltd” is selected as a convenient sample. It is one of the most prominent and leading
manufacturer of two and three wheelers in India. For analysis of the data significant ratios are
used.
Company Profile - Bajaj Auto Ltd
1st April, 2016 Page 1

Website: www.irjms.in Email: irjms2015@gmail.com, irjms.in@gmail.com
STUDIES
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Company’s production at its Pantnagar plant, Uttarakhand, has been on the rise. Average
production for January-March 2010 was 60,000 per month. The plant is now geared to produce
80,000 units per month in April-June 2010, and then ramp up to 120,000 vehicles per month by
September-December 2010. Keeping this in mind, the supply chain activities are also getting
geared up. Research & development has been working on improving its operations in number of
areas, such as:
 Manpower: Expanding the team size in areas of design, analysis and validation to keep
up with the rapidly expanding aspirations of the Company.
 Facilities: Enhancing R&D’s design, computing and test facilities. A notable addition has
been a world class NVH (Noise, Vibration and Harshness) laboratory, which has been
commissioned. This will give Bajaj Auto the ability to make even more refined products.
 Technology: R&D has developed the 4V DTS-i technology for outstanding engine
performance. Design optimization has enabled it to be used on the Pulsar 135 LS, which
competes at a lower price point. The DTS-i is controlled by a new generation CDI
(Capacitor Discharge Ignition), which takes continuous load and temperature inputs to
compute the optimum timing of each spark plug.
Company has started its Total Productive Maintenance (TPM) initiative ten years ago with its
manufacturing plants. In March 2007,it achieved a milestone of having all its manufacturing
facilities awarded as ‘TPM Excellence Category –1’ winners by JIPM (Japan Institute of Plant
Maintenance). Last year, TPM and quality initiatives at vendor plants gathered further
momentum and achieve many awards since its inception.
This initiative, the first of its kind in India, will align all key businesses and activities of the
Company. Company’s core competencies rest on its values of innovation, perfection and speed.
TPM is expected to build and continuously improve its core competencies, as also its entire
supply chain including its suppliers and dealers.1
Data Analysis
1. Operating profit to working capital ratio
Increase
Particulars Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Average
Operating Profit 1084.44 960.42 1580.74 1329.89 1085.21 1096.07 2.33
Net CA (Working capital) -1307.71 -1890.57 -795.42 -669 -238.56 -200.90 221.36
Operating Profit to WC Ratio -0.83 -0.51 -1.99 -1.99 -4.55 -5.46 -0.30
Above table signifies that since financial year 2004 until 2009 consistently company showed
negative working capital as compared to its operating profit averagely (-0.30). It means as far
as profitability is concern Company is performing well. However, on liquidity terms
company is suffering badly due to its improper management of current assets specifically2.
1 http://www.bajajauto.com/report/BAL-AR-2009-10.pdf
2 Financial reports of the company from the year 2004 – 2009

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2. Current asset to gross block ratio
Gross Block 2674.21 2513.69 2894.22 3178.54 2994.68 3350.2 2934.26
Total Current Assets 575.16 570.95 655.32 901.69 679.66 833.17 702.66
C.A to Gross block 0.22 0.23 0.23 0.28 0.23 0.25 0.24
Above table shows, out of the total assets invested in to business, hardly averagely 0.24
% is investing in currents assets. It resulted into that company is failed to efficiently use
their assets for generate turnover.
3. Average working capital

Total CL & Provisions 3734.97 4517.25 3734.97 4517.25 2019.23 2602.35 3521.00
Working capital -1307.71 -1890.57 -795.42 -669.00 -238.56 -200.90 -850.36
Above working depicts, consistently since financial year 2004 until 2009 company
showed negative amount invested in working capital averagely (- 850.36). It means,
overall profitability of the business sounds good but in reality company is suffering vary
badly on financial terms.
4. Current asset to net block ratio
Net Block 1114.97 1206.31 1133.00 1273.60 1268.61 1542.29 1256.46
C.A to Net block 0.52 0.47 0.58 0.71 0.54 0.54 0.56
Above table, revels company inability to efficient utilization of scared resources to
generate sales so that company it true scene will be in win situation.
5. Increase in sales to increase in working capital ratio
Increase
Net sales 4755.17 5736.35 7469.38 9420.24 8827.15 8700.17 789.00
Net CA (Working capital) -1307.71 -1890.57 -795.42 -669 -238.56 -200.90 221.36
Net sales to WC Ratio -3.64 -3.03 -9.39 -14.08 -37.00 -43.31 -2.12
The proportion in which sales is averagely increasing is not fairly resulted into average
investment in working capital of the business. So holistically, the long-term sustainability
of the company is questionable.
6. Current assets composition percentage

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Inventories 34.70 35.26 41.65 34.35 51.44 40.67 39.68
Sundry Debtors 52.61 52.40 46.02 58.76 40.51 43.05 48.89
Cash and Bank
Balance 12.69 12.34 12.34 6.89 8.05 16.28 11.43
Averagely 48.89 % are block into sundry debtors out of total current assets. It reveals
improper debtors management by company
7. Current liabilities composition percentage

Current Liabilities 37.99 37.27 37.99 37.27 58.70 52.96 43.70
Provisions 62.01 62.73 62.01 62.73 41.30 47.04 56.30
Total Current liabilities 100.00 100.00 100.00 100.00 100.00 100.00 100.00
No doubt, to secure unforeseen future, provisions are required. But such provisions
should be logically estimated and to be provided in the financial statements. Above table
shows that averagely 56.30% of current liabilities are kept for provisions signifies that
company wish to maintains high amount of reserve for future uncertainties.
Current assets to loans and advances
Inventories 199.6 201.3 272.93 309.7 349.61 338.84 278.66
Sundry Debtors 302.6 299.2 301.55 529.83 275.31 358.65 344.52
Cash and Bank Balance 72.96 70.45 80.84 62.16 54.74 135.68 79.47
Current Assets (CA) 575.16 570.95 655.32 901.69 679.66 833.17 702.66
Loans and Advances 1849.21 2,054.68 2,282.98 2,925.24 1,099.68 1,567.09 1963.15
Fixed Deposits 2.89 1.05 1.25 21.32 1.33 1.19 4.84
Total loans and advances
(LA) 1,852.10 2,055.73 2,284.23 2,946.56 1,101.01 1,568.28 1967.99
Total CA and LA 2,427.26 2,626.68 2,939.55 3,848.25 1,780.67 2,401.45 2670.64
Percentage of L A to CA 76.19 78.22 77.66 76.01 61.76 65.26 72.52
If we keenly observe the above table, we come to the conclusion that company
deliberately maintains averagely 72.52% out of total current assets. From the researcher’s
point of view it is injustice one hand that company is diverting their funds to secure their
subsidiary business units, and on the other hand creditors and unpaid almost for 4
months. It means company smartly playing on suppliers’ money to make safe their
subsidiaries.
8. Increasing working capital
Particulars Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Average Increasing
3 Related pages from the website money control.com

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0.679 (IIFS)
Total CL & Provisions 2602.35 2019.23 4517.25 3734.97 2793.00 2326.00 55.27
Net CA (Working capital) -200.90 -238.56 -669.00 -795.42 -204.00 -273.00 -14.42
Constantly negative working capital represents pitiable and dejected working capital
management by the company. Keeping unpaid sundry creditors almost for 120 day of the
year revels that company is doing their business on the funds of supplier.
10. Liquidity and solvency ratio
Current Ratio 0.78 0.77 0.79 0.84 0.88 0.84 0.82
Quick Ratio 0.64 0.65 0.69 0.76 0.64 0.73 0.69
Debt Equity Ratio 0.30 0.29 0.31 0.29 0.84 0.84 0.48
Long Term Debt Equity Ratio 0.29 0.30 0.31 0.29 0.84 0.71 0.46
Above ratios are not as per the industry standard results into unfair practices followed by
company in managing their working capital requirement.
11. Efficiency ratios
Inventory Turnover Ratio 30.11 28.89 34.14 36.88 29.33 28.64 31.33
Debtors Turnover Ratio 21.68 20.83 24.71 22.66 21.93 27.45 23.21
Investments Turnover Ratio 31.47 32.64 34.14 36.88 29.33 28.64 32.18
Fixed Assets Turnover Ratio 2.21 2.97 2.62 2.96 2.95 2.60 2.72
Total Assets Turnover Ratio 1.32 1.90 1.21 1.32 3.02 2.53 1.88
Asset Turnover Ratio 2.01 1.88 2.62 1.41 1.75 2.74 2.07
It was unfortunate but true that all efficiency ratios of company are as per the industry
standards or better than industry requirements. If we consider this as a true picture then
company shouldn’t be in working capital crises. So either the financial statements are
elegantly manipulated or in true sense business is not working on ethical terms.
12. Cash flow
Net Profit Before Tax 1287.56 1365.36 1580.74 1728.05 1247.62 958.09 1361.24
Net Cash From Operating
Activities 987.87 1042.21 1072.62 681.73 508.14 411.49 784.01
Net Cash (used in)/from
Investing Activities -807.45 -965.76 -1087.54 -429.99 -398.14 -207.66 -649.42
Net Cash (used in)/from Financing
Activities -9.14 -10.86 -11.68 -250.35 -190.41 -123.03 -99.25
Net (decrease)/increase In Cash
and Cash Equivalents -14.78 -20.14 -26.6 1.39 10.47 80.8 5.19
Opening Cash & Cash Equivalents 80.14 84.54 82.09 90.79 83.48 90.64 85.28
Closing Cash & Cash Equivalents 84.54 82.09 90.79 83.48 90.64 136.87 94.74
Company’s financial and investment management is pitiable resulted into consistently
generating negative cash flow since financial year 2004.
Findings

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0.679 (IIFS)
 Operating profit to working capital ratio was averagely constant negative (-0.30) refers to
ineffective management of working capital by the company.
 Current asset to gross block ratio was hardly 0.24 % signifies company inefficiency to
employ their assets to gear up revenue.
 Average working capital ratio was averagely negative (- 850.36) questions shot term
viability of the business and as well as sustainability of the company in long term.
 Current asset to net block ratio, averagely 0.56 shows company incapacity to resourceful
employment of petrified resources to generate turnover.
 Increase in sales to increase in working capital ratio average -2.12 resulted into unfair
growth of the business.
 Current assets composition percentage, out of total current assets averagely 48.89 % is
wedge into receivables shows indecent receivable management by the company
 Current liabilities composition percentage was averagely 56.30% of total current
liabilities which may not be logical
 Current assets to loans and advances, purposefully maintaining averagely 72.52% out of
total current assets as loans and advances, results into company nattily diverting their
funds from one business activity to their another subsidiary business unit.
 Increasing working capital, consistently negative averagely -14.42 represents pathetic
working capital management by the company.
 Liquidity and solvency ratios are adverse as compare to the industry standard shows
appalling usage of working capital by the company.
 Efficiency ratios of the company are better as compared to industry standards, but in real
sense it does not signifies the morality of conducting business by the company.
 Again and again, averagely maintaining negative cash flow resulted in to contemptible
situation for long term sustainability of the business.
Conclusion
No doubt working capital management talks about day to day business operations, further creates
its financial issues, if it is ignored by the businessman in early stages. To tackle such issues every
business rigorously analyzed each and every aspect of working capital. Generally every business
has to follows standard set of rules and regulations laid down in their policy manuals, but again
there is always a difference between what is in theory and what we follow in real world. If we
appropriately follow the theoretical aspect then we may come to a justifiable solution to every
problem, then and only then in real sense we will have holistic and sustainable development.

STUDIES
0.679 (IIFS)
References
 www.bajajauto.com/report/BAL-AR-2009-10.pdf
 Financial reports of the company from the year 2004 – 2009
 Related pages from the website money control.com
 Inter-Firm and Intra-Firm Efficiency Measures Journal of Productivity Analysis, 15, 185–199,
2001 Kluwer Academic Publishers, Boston.
 Management of Working Capital, by ParagNalinDoshi 1/12/2009.
 Mukhopadhyay, D. (2004). “Working Capital Management in Heavy Engineering Firms- A Case
Study”, the Management Accountant, I.C.W.A.I.
 Khan, M.Y. and Jain, P.K. (2004). “Financial Management”, 2nd Edition, Tata McGraw Hill.
 Rajeswara, Rao K. (1985):“Working Capital Planning and Control in Public Enterprises in
India”, Ajanta Publications, Jaipur.
 Chowdhury, A., & Amin, M. 2007. Working capital Management Practiced in Pharmaceutical
Companies listed in Dhaka Stock Exchange. BRAC University Journal,
 4(2), 75 -86.

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See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Working Capital Management: Truth behind curtain

Article · April 2016

The user has requested enhancement of the downloaded file.

Lt. Prof. Yashodhan P. Mahajan,

1st April, 2016 Page 1

2 Financial reports of the company from the year 2004 – 2009

1st April, 2016 Page 2

3. Average working capital

1st April, 2016 Page 3

7. Current liabilities composition percentage

3 Related pages from the website money control.com

1st April, 2016 Page 4

1st April, 2016 Page 5

1st April, 2016 Page 6

1st April, 2016 Page 7

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