Working Capital Management of Nepal Telecom

WORKING CAPITAL MANAGEMENT OF NEPAL DOORSANCHAR COMPANY LIMITED

Submitted by:

Sangita Bhandari Sharma Saptagandaki Multiple Campus T.U. Regd. No.: 7-2-240-49-2004 Exam Roll No.: 2400045 (Second year) Exam Roll no.: 2400048 (First year)

A Thesis Submitted to: Office of the Dean Faculty of Management Tribhuvan University

In the partial fulfillment of the requirements for the degree of Master's in Business Studies (MBS)

Bharatpur, Chitwan April, 2014

RECOMMENDATION This is to certify that the thesis Submitted by Sangita Bhandari Sharma

Entitled WORKING CAPITAL MANAGEMENT OF NEPAL DOORSANCHAR COMPANY LIMITED

has been prepared as approved by this department in the prescribed format of faculty of management. This thesis is forwarded for evaluation.

………………………

………………………

………………………

MR. Kapil Dev Subedi

Mr. Kapil Dev Subedi

Mr. Ram Prakash Adhikari

Thesis Advisor

Chairperson,

Campus Chief

Research Committee

Date:

i

VIVA-VOCE SHEET We have conducted the Viva-Voce examination of the

Thesis presented by

Sangita Bhandari Sharma

Entitled WORKING CAPITAL MANAGEMENT OF NEPAL DOORSANCHAR COMPANY LIMITED

and found the thesis to be the original work of the student and written according to the prescribed format. We recommended the thesis to be accepted as partial fulfillment of the requirement for

Master Degree in Business Studies (MBS)

VIVA-VOCE COMMITTEE Chairperson, Research Committee: ………………………. Member (Thesis Advisor): ………………………. Member (External Expert): ……………………….

Date:

ii

DECLARATION

I hereby declare that the work done in this thesis entitled "Working Capital Management of Nepal Doorsanchar Company Limited" submitted to Saptagandaki Multiple Campus, Faculty of Management, Tribhuvan University is my original work. It is done in the form of partial fulfillments of the requirement of the degree of Master of Business studies (M.B.S.) under the supervision and guidance of Mr. Kapil Dev Subedi, Lecturer of Saptagandaki Multiple Campus. Date:

Sangita Bhandari Sharma Researcher T.U. Reg. No: 7-2-240-49-2004 Saptagandaki Multiple Campus

iii

ACKNOWLEDGEMENT

This thesis entitled "Working Capital Management of Nepal Doorsanchar Company Limited." to the Tribhuvan University faculty of management for the partial fulfillment of the requirement of the Master in Business Studies degree at Saptagandaki Multiple Campus. It would have been almost impossible to complete without cooperation and help from different section of intellectuals. I would like to express my gratitude of thesis advisor Mr. Kapil Dev Subedi, respected lecturer of Saptagandaki Multiple Campus, Bharatpur, Chitwan, for his valuable suggestion and guidance. His continuous cooperation and coordination has been instrumental in the process of preparing this research work. I am also indebted to Mr. Gehendra Subedi, Engineer, Nepal Doorsanchar Company Limited for providing financial statements for this work. I am also appreciating to Classic Multiple Education for his expert work in designing & printing this dissertation. Last but not least, I am thankful to my all family members who have supported me to prepare this work.

Sangita Bhandari Sharma Saptagandaki Multiple Campus

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TABLE OF CONTENTS Recommendation Viva-Voce Sheet Declaration Acknowledgment Table of Contents List of Tables List of Figures List of Abbreviations

i ii iii iv v-vii viii ix x-xi

CHAPTER ONE INTRODUCTION 1.1 Background of the Study 1.2 Focus of the study 1.3 Statement of Problem 1.4 Research Question 1.5 Objective of the study 1.6 Significance of the study 1.7 Limitation of the study 1.8 organization of the study

Page No. 1-7 1 3 3 4 4 5 5 6

CHAPTER TWO REVIEW OF LITERATURE 2.1 Introduction 2.2 Conceptual of Framework 2.3 Concepts of Working Capital 2.3.1 Determinants of working capital 2.3.2 Source of Working capital 2.3.3 Applications of Working Capital 2.3.4 Working Capital policy 2.3.5 The Cost Trade-off 2.4 Classification of Working Capital 2.5 Need for working capital 2.6 Operating Cycle 2.7 Review of Research Studies 2.7.1 Review of International Studies 2.7.2 Review of Nepalese Studies:

8-33 8 8 10 12 14 15 16 19 20 22 24 25 26 26 v

2.7.2.1 Review of Journal and Article 2.8 Review of Dissertations 2.9 Research Gap

26 30 33

CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction 3.2 Research Design: 3.3 Population and Sample 3.3.1 Brief Introduction of Nepal Doorsanchar Co. Ltd. 3.4 Nature and Sources of Data: 3.5 Data Processing Procedures: 3.6 Presentation and Analysis of Data: 3.7 Tools of Data Analysis: 3.7.1 Financial Tools: 3.7.2 Statistical Tools:

34-50 34 34 35 35 36 36 36 36 36 48

CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA 4.1 Introduction 4.2 Position of Current Assets: 4.3 Composition of Working Capital (Financial Ratio) Analysis: 4.3.1 Proportion of Current Assets to Total Assets: 4.3.2 Proportion of Current Assets to Fixed Assets: 4.3.3 Proportion of Cash and Bank Balance to Current Assets: 4.3.4 Proportion of Cash & Bank Balance to Total Assets: 4.3.5 Proportion of Inventories to Total Assets: 4.3.6 Proportion of Inventory to Current Assets: 4.3.7 Proportion of Receivables to Total Assets: 4.3.8 Proportion of Receivables to Current Assets: 4.4 Liquidity Position: 4.4.1 Current Ratio: 4.4.2 Quick Ratio (Acid Test Ratio): 4.4.3 Cash Ratio: 4.4.4 Working Capital to Current Assets Ratio: 4.5 Profitability Position: 4.5.1 Gross Profit Margin (GPM):

51-92 51 51 54 54 55 56 57 58 59 60 61 61 62 63 64 65 66 66

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4.5.2 Net Profit Margin (NPM): 4.5.3 Operating Ratio (OR): 4.5.4 Return on Assets (ROA): 4.5.5 Return on Net Worth (RONW): 4.5.6 Return on Working Capital (ROWC): 4.6 Turnover Ratio: 4.6.1 Working Capital Turnover (WCT): 4.6.2 Inventory Turnover Ratio (ITR): 4.6.3 Receivables Turnover Ratio (RTR): 4.6.4 Cash and Bank Balance Turnover Ratio: 4.7 Leverage Ratio: 4.7.1 Short-term Financing (STF) to Long-term Financing (LTF) Ratio: 4.7.2 Short-term Financing (STF) to Total Financing (TF) Ratio: 4.8 Cash Conversion Cycle Model: 4.9 Trend Analysis (Time Series Analysis) 4.9.1 Trend Analysis of Sales 4.9.2 Trend Analysis of Inventory 4.9.3 Trend analysis of Current Assets 4.9.4 Trend analysis of Current Liabilities 4.10 Simple Regression Analysis 4.10.1 Regression Analysis of Inventory and Net Profit after Tax 4.10.2 Regression Analysis of Current Assets and Net Profit after Tax 4.10.3 Regression Analysis of Current Assets and Current Liabilities 4.11 Multiple Regression Analysis 4.11.1 Multiple Regression Analysis of NPAT on CA & CL 4.12 Major Findings CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 Summary 5.2 Conclusion 5.3 Recommendation Bibliography Appendices

vii

67 68 69 70 71 72 73 74 75 76 77 78 78 79 80 81 82 84 85 85 85 86 86 87 87 88

93-97 93 94 95 98-99 100-124

LIST OF TABLES Table No. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 4.34

Titles Page No. Position of Current Assets 53 Current Assets and Total Assets 54 Current Assets to Fixed Assets 56 Cash and Bank Balance to Current Assets 57 Cash & Bank Balance to Total Assets 58 Inventory to Total Assets 59 Inventory to Current Assets 60 Receivables to Total Assets 60 Receivables to Current Assets 61 Current Ratio 62 Quick Ratio 63 Cash Ratio 64 Working Capital to Current Assets Ratio 65 Gross Profit Margin 66 Net Profit Margin 67 Operating Ratio 68 Return on Assets 69 Return on Net Worth 70 Return on Working Capital 71 Working Capital Turnover 72 Inventory Turnover 73 Receivable Turnover 74 Cash and Bank Balance Turnover 75 Short-term Financing (STF) to Long-term Financing (LTF) 76 Short-term Financing (STF) to Total Financing (TF) 77 Cash Conversion Cycle 78 Trend Analysis of Sales of SDL 79 Trend Analysis of Inventory of SDL 81 Trend Analysis of Current Assets of SDL 82 Trend Analysis of Current Liabilities of SDL 84 Simple Regression Result of Inventory on NPAT 85 Simple Regression Result of Current Assets on NPAT 86 Simple Regression Result of Current Assets on CL 87 Multiple Regression Analysis of NPAT on CA & CL 88 viii

LIST OF FIGURES Figure No. 2.1 2.2 2.3 2.4 2.5 2.6 4.1 4.2 4.3 4.4

Titles

Page No.

Sources and Application of Fund Aggressive Approach Conservative Approach Moderate Approach The Cost Trade-off Types of Working Capital Trend Analysis of Sales of NDCL Trend Analysis of Inventory of NDCL Trend Analysis of Current Assets of NDCL Trend Analysis of Current Liabilities of NDCL

ix

16 17 18 19 20 22 80 82 83 84

ABBREVIATIONS ACP

= Average Collection Period

CAs

= Current Assets

CBB

= Cash and Bank Balance

TA

= Total Assets

CCC

= Cash Conversion Cycle

CLs

= Current Liabilities

Co.

= Company

COGS

= Cost of Goods Sold

CR

= Current Ratio

DSO

= Days Sales Outstanding

FY

= Fiscal Year

GOS

= Gross Operating Cycle

GPM

= Gross Profit Margin

GWC

= Gross Working Capital

I

= Inventories

ICP

= Inventory Conversion Period

ITR

= Inventory Turnover Ratio

Ltd.

= Limited

LTF

= Long-Term Financing

NOC

= Net Operating Cycle

NPM

= Net Profit Margin

NWC

= Net Working Capital

OC

= Operating Cycle

OR

= Operating Ratio

PCP

= Payable Conversion Period

PDP

= Payable Deferral Period

PE

= Probable Error x

PEs.

= Public Enterprises

QR

= Quick Ratio

r

= Correlation Coefficient

RCP

= Receivable Conversion Period

ROA

= Return on Assets

RONW

= Return on Net Worth

ROWC

= Return on Working Capital

RTR

= Receivable Turnover Ratio

STF

= Short-Term Financing

TF

= Total Financing

WC

= Working Capital

WCT

= Working Capital Turnover

NT

=Nepal Telecom

NDCL

=Nepal Doorsanchar Company Limited

CDMA

= Code Division Multiple Access

GSM

= Global System of Mobile Communication

PSTN

= Public Switched Telephone Network

ADSL

=Asymmetric Digital Subscriber Line

NTC

=Nepal Telecom

ISDN

=Integrated Services Digital Network

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CHAPTER ONE Introduction 1.1 Background of the Study The term working capital implies a company’s investment in short term assets cash, short term securities, accounts receivables and inventories. Precisely, these assets are financed by short-term liabilities, thus net working capital is current assets less current liabilities. Working capital management is the decision relating to working capital and short term financing, and this includes managing the relationship between the company’s short-term assets and its short-term liabilities. This enables the company to continue operations and to have enough cash flow at its disposal to satisfy both maturing short-term debt and upcoming operational expenses, which is the major objective of working capital management. The efficient management of working capital is very vital for an organization. This is premised on the fact having too much working capital signifies inefficiency, whereas too little cash at hand signifies that the survival of business is shaky. The concept of working capital management is all about the commercial and financial parts of credit, inventory, marketing, purchasing, royalty and investment policy. The greater the profit margin, the lesser is likely to be the level of working capital tied up in creating and selling titles. The difference between current assets and current liabilities is known as working capital. The main current assets are stock, debtors and cash, while current liabilities are creditors and accrued expenses. The main issue in the word "Current" is that it is anticipated to change into cash, or perhaps be paid from cash, within the period of twelve calendar months. As a rule of thumb, an organization wishes to tie up little money as much as possible in working capital. Nevertheless, 1

there are always trade-offs. One peculiar problem for business is running out of cash, which consequently leads to failure to make employees’ payrolls, or business might be unable to offer services due to absence of essential resources. In Nepal, operating any form of telecommunication service dates back to 94 years in B.S. 1970. But formally telecom service was provided mainly after the establishment of MOHAN AKASHWANI in B.S. 2005.Later as per the plan formulated in First National Five year plan (2012-2017); Telecommunication Department was established in B.S.2016. To modernize the telecommunications services and to expand the services, during third five-year plan (2023-2028), Telecommunication

Department

was

converted

into

Telecommunications

Development Board in B.S.2026. After the enactment of Communications Corporation Act 2028, it was formally established as fully owned Government Corporation called Nepal Telecommunications Corporation in B.S. 2032 for the purpose of providing telecommunications services to Nepalese People. After serving the nation for 29 years with great pride and a sense of accomplishment, Nepal Telecommunication Corporation was transformed into Nepal Doorsanchar Company Limited from Baisakh 1, 2061. Nepal Doorsanchar Company Limited is a company registered under the companies Act 2053. However the company is known to the general public by the brand name Nepal Telecom as registered trademark. Nepal Telecom (Nepal Doorsanchar Company Limited) is incumbent telecom operator in Nepal which provides various kinds of services. Service ranges from basic telephone to mobile and internet services. Pace of technological changes in tele-communication service is very rapid. Telecom operator like Nepal Telecom should be with these technological advancement in order to stay competitive in the market. Working capital management decision is very important for Nepal Telecom for increasing its profitability.

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1.2 Focus of the study The study will be focused on working capital management of the company. The tradeoff between profitability and liquidity will be analyzed. Profitability will be measured in terms of return on sales, return on asset and return on equity. Liquidity position plays vital role to manage the working capital Liquidity position shows the ability to pay the bills. Liquidity fulfills the current need of money. Here, the current ratio, quick ratio, cash ratio and working capital to current assets ratio of NT during five years period of study will be observed. 1.3 Statement of the problem Working Capital Management becomes difficult in many organizations. In most enterprises the management of working capital has been misunderstood as the management of money and the managers are found over conscious about the burdening of money rather than its efficient utilization. Regarding the management of working capital sources most of the public enterprises have never been through seriously. They are usually found to depend upon Nepal government even for overcoming the shortages of Working Capital in spite of trying to manage Working Capital needs form depreciation fund and utilized surplus to overcome of working capital. Working Capital management has been the most challenging area of modern corporate finance is as much as the management always faces a tradeoff between liquidity and profitability of firm. As working capital management is important instrument for every organization for their success. They should invest available funds adequately in current assets otherwise it will seriously erode their liquidity base. They must select the type of current assets suitable for investment in proportionate percentage to raise their operational efficiency. Working capital is required to ascertain turnover of current

3

assets that greatly determine the prodigality of the organization. A firm must have sufficient finished products. The efficient management of working capital is useful for every organization over investment, unpredictability affirms, whereas mismanagement of current liabilities will have a negative impact on both cost of capital and risks of the organization.

Nowadays most of the companies have recognized the importance of working capital management. Even then they are not able to obtain full advantages of working capital management. This company is also facing problem considered with working capital management. The working capital of the company is not satisfactory and encouraging. They are maintaining high level of current assets. 1.4 Research Questions 1. What is the liquidity position of the company? 2. What is the relationship between working capital management and profitability of the company? 3. What types of inventory techniques are adopted by the company? 4. What working capital policy the company is following? 5. What is the size of the investment in each type of the working capital? 1.5 Objective of the study Working Capital management is important instrument for any organization. Success or failure of any organization depends on its investment in current assets. They should invest in right percentage so that there will not be excess liquidity. The main objective of this study is to examine the working capital management of Nepal Telecom. The specific objectives are as follows: 1. To analyze the liquidity position of the company.

4

2. To analyze the relationship between working capital management and profitability of the company. 3. To examine the types of inventory policy adopted by the company. 4. To analyze the working capital policy of the company. 5. To examine the size of the investment in each type of the working capital. 1.6 Significance of the study Working capital is related with the short term assets, i.e. current asset. Significant amount of total assets are invested in current assets. So, it is necessary to study about the working capital management in organization. The significance of the study of it is important for following reasons: 1. A large proportion of the financial management time is allocated to working capital management. 2. Large proportion of the total assets is typically invested in current assets. 3. The relation between sales, growth and invest in current assets is close and direct. 4. This study will attempt to measure the efficiency on working capital of the Company and there by anyone can easily know how far it has been successful in this area. 5. This study will provide relevant and pertinent literature for the future research on the area of working capital management. 1.7 Limitation of the study Data collection of related field is very difficult in Nepal. In order to make a study on such topic more fruitful, it is essential that it should be collected in frequent time intervals. So, this study will face many difficulties. The limitation of the proposed research will be as follows: 1. This study will be limited to the working capital management of the company which is sample to study about the working capital. 5

2. This study will depend upon five years data from fiscal year 2064/65 to 2068/69. 3. Only financial tools and statistical will be taken for analyzing the working capital management of the company. 1.8 Organization of the study This study will organized in five chapters as follows. 1. Introduction The first chapter will describe shortly of different topic. This chapter will include background of the study, statement of problem, objectives of the study, signification of the study, limitation of the study and organization of the study. 2. Review of Literature This chapter will include the conceptual framework of the related topic and writers and deal the general concept of the write and thesis towards the working capital management. This will include the opinion of different writers regarding with the thesis topic. It will also include review of previous related research studies previous student. It will be concerned with the concept of working capital management and other related previous thesis with working capital management and research gap. 3. Research Methodology This chapter will deal with research design, nature and source of data, data processing procedures and tools of data analysis. 4. Presentation and Analysis of data In this chapter the collected data will be analyzed to greats the final result of the working capital management. Those data will be analyzed by financial and statistical tools which will shows the different results that are Profitability,

6

Liquidity, relationship between and among of different variables for analysis and major findings. 5. Summary Conclusion & Recommendation This will be the last chapter of the thesis. This chapter will include the summary, conclusion drawn from the study of the thesis. And recommendation would also be presented in this chapter regarding the study. Lastly, Bibliography and other appendices used in the study will be attached at the end of the study.

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CHAPTER TWO REVIEW OF LITERATURE 2.1 Introduction Review of Literature means reviewing research studies or other related Proposition in related area of the study so that all the past studies, their conclusions and deficiencies may be known and further research can be conducted. Under this section of the study the conceptual review related to the working capital management, the review of Journals and articles and the review of the thesis have been presented. Every business needs capital basically for two purposes. The first requires for long term purpose which is called Fixed Capital. Such funds are required to create production facility. Investment in plants, machinery, land, building etc. comes under production activity. Investment in these assets represents that part of firm’s capital which is block on a permanent or fixed basis. Such assets are not purchased with the objective of resale. To operate business, a firm also needs another type of capital which is known as Short Term Capital or Working Capital. The funds required for purchased of raw material, payment of wages and another day to day expenses etc. is called as Working Capital. Similarly, the investment required for work-in-progress, raw material, finished goods, sundry debtors, bills receivable etc. also comes under working capital. 2.2 Conceptual of Framework Working capital management refers to the proper management of firm's current assets and current liabilities. It is concerned with the all decisions and acts that influence the determination of the appropriate level of current assets and their efficient use as well as the choice of the methods of financing them, keeping in view of liquidity. It is needed to run the organizations, day to day in efficient manner. Thus, working and total current assets are synonymous. It is also called 8

circulating capital, since it keeps on circulation, the course of business operation. Business starts with cash, which is converted into inventory after sometimes. Inventory may be of raw materials, semi-finished goods and finished goods. The inventory is converted into receivables and receivables into cash again. Thus the cycle becomes complete. This kind of cycle keeps on operating the organization. The length of cycle would differ depending upon the nature of business. Generally cycle would be short for non-manufacturing company. Working capital is controlling nerve of business organization. The terms working capital of trend is used to refer the firm's current assets (primarily cash, marketable securities, account receivable, and inventories). Working capital refers to the fact that most of its components very closely related with the label of production and sales working capital referred to as short term finance. Gross working capital refers to firm's total current assets where as Net working capital is current assets minus current liabilities. Working capital may be defined as assets held for current use within a business less then among due to those await settlement in short term in whatever form. This idea embraces the recurring transaction from cash to inventories to receivables to cash that form the conventional chain of business operations. Funds employed for short term are mainly for working Capital or operational business. Towards the day to day operation, a firm will have to provide money towards, the purchase of raw materials, payments of wages and salaries to extend credit to buyers of goods and services as well as to meet other day operations. Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and inter relationship that exist between them. The current assets refers to those assets which in the ordinary course of value and without disrupting the operation of the company. The major current liabilities are those liabilities which are intended at their inception to be paid in the ordinary course of business within a year, out of current assets or earnings of the concern. The basic current liabilities are bills payable, capital 9

overdraft outstanding expenses. The goal of working capital management is to manage the firm's current assets and current liabilities in such a way that the satisfactory level of WC is maintained. 2.3 Concepts of Working Capital There are two concepts or working capital: i) Gross concept

ii) Net Concept

The term "Gross Working Capital" also referred to as working capital means the total current assets. Similarly, "Net Working Capital" can be defined in two ways: (I) the most common definition of Net Working Capital (NWC) is difference between current assets and current liabilities, (II) and alternative definition of NWC is that portion of firm's current assets which is financed with long-term funds (Gitman, 2006: 137) WC has to be regarded as one of the conditioning factors in the long-run operations of firm which is often inclined to treat it as an issue of short-run analysis and decision making. WC management involves deciding upon the amount of composition of CA and how finances these assets (Kuchhal, 2005:9) There are two concepts of working capital-gross concepts and net concepts. Gross WC, simply called as Working capital, refers to the firm's investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash short-term securities, debtors, bills receivables and stock (inventory). Net Working Capital refers to the different between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected for payments with in an accounting year and include creditors, bills payable and outstanding expenses. Net Working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital will occur when current liabilities are in excess of current assets. (Pandey, 2009:76)

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The two concepts of working capital- gross and net are not exclusive; rather they have equal significance from management viewpoint. The gross working capital concept focuses attention on two aspects of current assets management, (a) Optimum investment in current assets and (b) financing of current assets. The consideration of the level of investment in current assets should avoid two danger points- excessive and inadequate Investment in current assets. Investment in current assets should be just adequate, nor more not less, to the needs of the business firm. Excessive investment in current assets should be avoided because it impairs firm's profitability, as idle investment earns nothing. On the other hand, inadequate amount of current assets can threaten solvency of the firm if it fiats to meet its current obligations. It should be realized that the working capital needs of the firm might be fluctuating with changing business activity. This may cause etches or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalances. (Pandey, 2009:78) The definitions described above convey in some way or other, the same meaning. They virtually represent the characteristics of the WC. It seems that there is consensus on the following special characteristics of the working capital. a) Short life: WC is characterized by assets with a life span of less than 1 year such as cash, marketable securities, accounts receivable, and inventories etc. This short life span leads to high volatilities in the level of investments required to finance WC. b) Nearness to cash or liquidity: This basic characteristic constitutes the first line of defense against technical insolvency. Cash is the most liquid assets having zero conversion time and 100 percent conversion rate. But for inventory and marketable securities two factors i.e. (I) nearness to cash or amount of time required converting assets into cash, and (II) Price realized on conversion must be considered.

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c) Lack of synchronization: Since the company cannot produce on order only and cannot insist on cash payments there is always the problem of synchronization in cash receipts and disbursements. It is also due to the level of investments in WC that is affected by the sales volume, production policies and collection policies. The basic characteristics of WC as mentioned above indicate that it is a term of capital intended to be kept moving or circulation and its potential for earning comes from movements. Though the expenditure can be controlled and planned its income is usually subject to random variation and is not controllable. 2.3.1 Determinants of Working Capital Requirements Of working capital depend upon various factors such as nature of business, size of business, the flow of business activities. However, small organization relatively needs lesser working capital than the big business organization. Following are the factors which affect the working capital of a firm. I.

Size of Business Working capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital.

II.

Nature of Business Working capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital.

III.

Storage Time Or Processing Period

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Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress. IV.

Credit Period Credit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed. But, the firm which allows less credit period to customers’ needs less working capital.

V.

Seasonal Requirement In certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements.

VI.

Potential Growth Or Expansion Of Business If the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business.

VII.

Changes In Price Level Change in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets.

VIII.

Dividend Policy The dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earnings. 13

If a firm retains more profit and distributes lower amount of dividend, it needs less working capital. IX.

Access to Money Market If a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital.

X.

Working Capital Cycle When the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital.

XI.

Operating Efficiency The operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.

2.3.2. Source of Working capital The working capital can be obtained from different sources. The sources are: i.

Funds from operation: The major source of working capital is the funds from operation, which refer to those funds which are generated by carrying out the central operations of a business.

ii.

Process from the sale of non-current assets: Sale of non-current assets in amount will convert non-current assets to a current asset and is a source of fund regardless of the fact whether the asset is sold for a gain or loss.

iii.

Long-term Borrowing: Long-term borrowing such as issue of debentures and convertible bonds results in the increases of current assets (cash) and therefore an increase in the working capital in case of short term borrowing, the increase of current asset is offset by an increase in the current liabilities and therefore result is no change in working capital.

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iv.

Issue of shares for cash: Issue of share results in an inflow of current assets and is therefore a source in the case of the proprietorship and partnership concerns additional capital introduced was source of funds.

v.

Non-operating Income: Incomes like dividend, interest received from operations outside the framework of the central operation of a business results in an inflow of current assets and, therefore, to be shown as source.

2.3.3. Applications of Working Capital Purchase of Fixed Assets: The purchase of long-term assets, such as plant and equipment, either reduces current assets and or increases current liabilities. Consequently, the working capital is reduced. i.

Redemption or payment of long-term debt: Repayment of a short-term debt is not considered as the uses of fund, since both current assets and current liabilities are reduced by the same amount. But the payment of a long-term debt results in the reduction of a current asset and is, therefore, use of fund.

ii.

Redemption of preference shares or investment made: When cash is paid to redeem preference shares or to purchase securities as investment, working capital is reduced and therefore is use of fund.

iii.

Loss from operations: Any loss from the operation results in more outflow of funds as compared to inflow of funds and is, therefore, use of funds.

iv.

Payment of dividend, tax etc: Any dividend or tax paid in cash results in outflow of current assets, therefore, and application of funds.

The sources and application of funds are diagrammatically shown in the following figure.

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2.3.4. Working Capital Policy The components of WC constitute the current assets and they are way financing i.e. current liabilities. The term current assets refers to those assets which is the ordinary course of business can be or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm (Khan & Jain, 2006) In a company, the level and quality of current assets and current liabilities is guided by the WC policy and management adopted by it. WC management involves all aspects of the administration of current assets and current liabilities. In other word, WC management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them. The crux of the problem whole formulating working capital policy is to maintain optimality on at the level of investment in cash and the financing of current assets. There should be optimum investment in the level of current assets because excessive or idle investment in

16

current assets earns nothing to the enterprise and consequently affects the profitability. On the other hand, inadequate level of investment in current assets threatens the solvency of the enterprises if it fails to meet obligation when they become due. So, WC policy should be designed to overcome such imbalance when they arise. In the same way the financing aspects of currents should not be over looked in its management. Because whether to use long term or short-term funds to finance current assets have significant impact on an enterprise risk or return, liquidity and profitability. As it is known funds long term as well as short term involve cost. And cost of financing is a deciding factor in the use of type of funds in any enterprises. a. Aggressive Approach In the approach variable as well as a portion of permanent current assets is financed through short-term borrowing. Some aggressive firms may even finance a part of their fixed assets with short financing (Pandey, 2009). Hence, this sort of mix financing increases the profitability and exposes towards risk by financing relatively larger portion of its assets lower cost short term borrowing.

17

b. Conservative Approach The financing policy of the firm is said to be conservation when it depends more on long-term funds for financing needs. Under a conservative plan, the firm finances its permanent assets and a part of temporary current assets; it stores liquidity by investing surplus funds into marketable securities. The conservative plan relies heavily on long term financing and therefore, is less risky. The conservative financing policy is shown in below figure, It is less risk approach resulting lower return.

c. Moderate Approach In this policy the firm finances the permanent current assets with long term financing and temporary with short term financing. It lies in between the aggressive and conservative policies. It leads to neither high nor low level of current assets and current liabilities. Below figure shows short-term financing and long term by long term financing. Thus working capital is zero under this policy.

18

2.3.5. The Cost Trade-off WC management involves decision upon the amount and composition of current asses and how they finance these assets. The relative proportion of liquid assets the lesser the risk of running out of cash of all other things are equal. Profitability, unfortunately, also will be less. The longer the composite maturity schedule of securities used to finance the firm less the risk of cash insolvency, all other things being equal. Again the profits of the firm are likely to be less. Resolution of the tradeoff between risk and profitability with respect to these decisions depend upon the risk preference of management (Pandey: 2009)

19

2.4. Classification of Working Capital Working capital can be classified into two categories: i.

Permanent or fixed working capital

ii.

Variable or temporary or fluctuating working capital

i)

Permanent of fixed working capital The need for current assets arises because of the operating cycle. The operating cycle is a continuous process and, therefore, the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same, it increases and decreases over time. However, there is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent, or fixed, working capital. It is permanent in the same way as the firm’s assets are. Depending upon the changes in production and sales, the need for working capital, over and above permanent working capital will fluctuate.

20

“The volume of investment in current assets changes over a period of time. But always there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operating cycle. It is the investment in current assets which is permanently locked up in the business and therefore known as permanent working capital (Weston, 1996: 333). ii)

Variable working capital: The extra working capital, needed to support the changing production and sales activities is called fluctuating, or variable, or temporary working capital. Both kinds of working capital-permanent and temporary-are necessary to facilitate production and sale through the operating cycle, but temporary working capital are created by the firm to meet liquidity requirements that will last only temporarily (Pandey, 1999: 814-815). “It is the volume of working capital which is needed over and above the fixed working capital in order to meet the unforced market changes and contingencies. In other words any amount over and about the permanent level of working capital is variable or fluctuating working capital. This type of working capital is generally financed from short term sources of finance such as bank credit because this amount is not permanently required and is usually paid back during off season or after the contingency” (Smith, 1974: 5).

21

2.5. Need for working capital The connotation of energy in the term working capital is indeed accurate. It refers to the resources of the firm that are used to conduct operation to do the day-to-day “work” that makes the business successful. Without cash, bills cannot be paid. Without receivables, the firm cannot allow timing differences between delivering goods and services and colleting the money to pay for them. Without inventories, the firm cannot engage in production, nor can it stock goods to provide immediate deliveries. As a result of the critical nature of current assets, the management of working capital is one of the most important areas in determining whether a firm will be successful. Following are the main advantages of maintaining adequate amount of working capital in the business: i)

Solvency There will be uninterrupted flow of production by an arrangement of adequate working capital. A business can run smoothly only in the presence of adequate working capital. In this situation, the short term liability can be paid within a short period. Thus it helps to strengthen the solvency position of a business.

22

ii)

Goodwill A firm with sufficient working capital can provide the payment within time to employees, workers and creditors. In such a case, there is no complaint against the firm. As a result, it helps a firm in creating and maintaining goodwill.

iii)

Easy Loans A reputed company having adequate working capital need not face any problem to get loan. It can arrange the loan easily from the bands and financial institutions for the funds which are necessary to operate a business.

iv)

Cash Discount A business firm having adequate capital can easily manage the cash for purchases of the goods. Immediate payment of cash enables a concern to receive huge discount on purchases and hence it reduces the cost.

v)

Regular Supply of Raw Materials In the case of sufficient working capital, it can easily supply raw materials necessary for production and there is no chance of disturbance in production. The uninterrupted flow of production enables the concern to supply its production in the market regularly.

vi)

Morale of Management With the help of adequate working capital, the overall efficiency of the business increases. It creates an environment of security, confidence and high morale of management.

vii)

Smooth Operation of Business A firm with sufficient working capital can smoothly operate the business. Due to adequate working capital, it can make regular payment of salaries, wages and other day-to-day commitments. By paying these expenses regularly at time, the morale of employee’s increases on one hand and on the other, their efficiency also increases. 23

viii)

Ability to Face Crisis A business concern has naturally to face various problems such as economic depression, strike, natural disaster etc. Availability of working capital insufficient volume gives the business concern ability to face these kinds of crisis easily.

ix)

Regular Return The management of ample working capital helps a firm to pay quick and regular dividends to its investors. Because of adequate working capital, the firm does not have to plough back of profit and hence it provides confidence to its investors and creates a favorable market to raise additional funds in the future.

2.6. Operating Cycle Current assets are needed because sales do not convert into cash instinctually. There is always an operating cycle involved in the conversion of sales into cash there is different between current and fixed assets in terms of their liquidity. A firm requires many years to recover the initial investment in current asset such as invent ones and book debt (actually receivables) is realized during the firms operating cycle, which is usually less the then a year. Operating cycle is the time duration required into inventories into cash. The operating cycle of a service company involved there phases. i) Technology selection and procurement of communication equipment ii) installation and commissioning iii) commercialization (Sales of Services almost in cash) These phases affect cash flow, which most of the time, are neither synchronized nor certain. They are not synchronized because cash outflows usually occur before cash inflows. They are not certain because sales and collections, which give rise to cash inflows, are difficult to forecast accurately. Cash outflows, on the other are relatively certain. The firm is therefore required to invest in current assets for a

24

smooth, uninterrupted functioning it needs to maintain liquidity to purchase equipment and pay expenses such as wages and salaries The length of the operating cycle of a Service firm is the sum of (I) Procurement period and (ii) installation and commercialization period. The procurement period is the total time needed for purchasing and delivery of project equipment. In practical, a firm may acquire resource on credit and temporarily postponed payment of certain expenses. Payables that the firm can defer are spontaneous sources of capital to finance; investment the length of time the firm is able to defer payment on various resource purchases. The difference between (gross) operating cycle and payable deferral period is not operating cycle (NCO). If depreciation is excluded from expenses in the computation operating cycle, the net operating cycle also represent cash conversion cycle. It is net time interval between cash collection from sale of the product and cash payment for resource acquired by the firm. It also represent time interval over which additional funds, called working capital, Should be obtained in order to carry out the firm's operations. The firm has to negotiate working capital from source such as commercial bank. The negotiated sources of working capital financing are called non-spontaneous source. If net operating cycle of a firm increases, it means further need for negotiated working capital. 2.7 Review of Research Studies It is also important to review the relevant research studies relating to working capital to add input in this study. In this regard the review has been arranged in two ways. i.

Review of international studies

ii.

Review of national studies

2.7.1 Review of International Studies It makes more relevant and to add input in this study some international studies are also reviewed.

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As it is not possible to estimate working capital accurately, the firm must decide about levels of current assets to be carried. The current assets holding of the firm will depend upon the working capital policy. It may follow a conservative or on aggressive policy. These policies have different risk return implications (Van Horne, 2005). The financial manager should determine the optimum level of current assets so that the wealth of share holder will be maximized. In fact, optimum level of each type of current assets should be fixed (Walker, 2006). To find out corporate bankruptcy Zeta made was developed by Altman and other (Altman, 2000). The authors extended the Z core model to include, among other things, the capitalization of leases and they updated its application. A sample of 53 among bankrupt firms and 58 non-bankrupt firms were employed. Manufacturing and for the first time any study relating companies were included. On the basis of discriminatory ability, 27 original variables were reduced to 7: the return on assets ratio, the stability of earning, the current ratio and the size of total assets using the linear discriminate model, the authors were successful in predicating up to 5 years period to failure successful classification ranged from 96 percent 1 year before failure to 70 percent and 5 years before 10 percent failure, or better performance than the z core model. Both quadratic and linear model were tested, with the linear function winning out.

2.7.2.1 Review of Journal & Articles Besides reviewing of international studies some local studies are also reviewed in this study such as journal/articles, various published articles by different management exports relating to working capital management. Shrestha, 1983, in this study entitled "Working capital management in Public Enterprise," states that manager often lacks basic knowledge of working capital and its overall impact on the operative efficiency and financial viability of public enterprises. The study has been based on sample of ten public enterprise i.e.

26

Birgunj Sugar factory. Janakapur Cigarette factory, Roghupati Jute Mills, Development Corporation, National Trading Ltd, Royal Drugs Ltd, National Construction Company of Nepal, Harisiddhi Bride and Tile Factory Nepal, Cheery Ghee Industry Ltd, and Chandesowori Textile Factory Ltd. The study has pointed at certain policy flows such as deficient financial planning, neglect of working capital management deviation between liquidity and turnover etc. He has suggested some measure for their effective funds, determination of management information system and determination of sound combination of short-term and long term source to finance working capital requirements. Shrestha found that receivable turnover calculated varied, from lowest record of 0.09 times 1 to the highest level of 25.7 times and was less than favorable in selected public enterprises (PEs) of Nepal. And those revealing favorable turnover have still faced problem of managing account receivables. He pointed that EPs did not record a cautions policy to improve collection that would have helped a lot in raising the receivable turnover. The average collection period recorded a variation from a minimum 14 days to the maximum of 4027 days. In the same way the again schedule of PEs has uniform patterns and the outstanding receivable in many instances were very old even exceeding ten years or so forth. It was grouped under above three years old receivable. In the selected enterprises the ratio of receivable CAs varied from a minimum of 0.15 times 1 to maximum 0.9 times 1. He also found that most of the EPs has larger share of receivable to CAs. In most of them extension of additional relaxed credit was a usual phenomenon and they did not have larger amount of receivable outstanding. They had not taken seriously the taste to speed up the collection of long outstanding receivable by devising suitable credit monitoring policy. The study thus concluded that determining the desired investment in account receivable was least considered in most of the EPS. Acharya, 1985, in this study entitled, "A comparative study of Problems in Management of Working Capital in Nepalese Enterprise". He has stated that in

27

Nepalese Enterprises the management of money and managers are found over conscious about receiving of money rather than its efficient utilization. Thus, the existing problems in the finance are mostly directed towards the management o WC rather than in any area. In his number of studies it has been repeatedly found that the gross in efficiency exist in the operation of public Enterprises. He has stressed on high cost of production which have left these EPs in less secured position. Thus, he farther added the cost reduction is the only possible measure for smooth operation and long-term existence of the public enterprises in Nepal. The cost reduction program is highly associated with the optimization of working capital. He has focused some operational and organizational problems of Nepalese PE not following traditional worm 2:1 between CA and CL, low rate of inventory turnover, change in WC in relation to fixed capital has very low impacts over the profitability not following conventional of debt equity as 1:1; than transmutation of capital employed into sales management information, ineffective use of performance evaluation tools and techniques and WC management has never been considered a managerial job. Similarly, he has suggested that PEs finance staff must be acquainted with the modern scientific tools used for the presentation and analysis of data. He further suggests avoiding the system of crisis decision, which prevailed frequently in their operation. They have to follow system and method for decision making. Lastly he has given emphasis to optimize its level of investment at a point of time. Neither over nor under investment in WCs is desired by the management of enterprises. Both of these situations will erode the efficiency of the concern. Pradhan (1986), in this study entitled "Working capital management of selected manufacturing PEs of Nepal". The Specific objectives under taken in his study are: i)

To conduct risk return analysis of liquidity of working capital position.

ii)

To assets the short-term financial liquidity position of the enterprises.

iii)

To asset the structure and utilization of WC and

28

iv)

To estimate the transactions demand function of working capital and it’s variation

His study has mentioned the following findings: i)

It has found that most of the selected enterprises have been activating a trade of between risks and return there by following neither an aggressive nor a conservative approach.

ii)

It has showed a poor liquidity of most of the enterprises. This poor liquidity position has been noticed as the enterprises have either negative cash flows or negative earnings before tax or they have excessive net current debts which cannot be paid within a year.

iii)

The Nepalese manufacturing PEs have on a average half of their total assets in the form of CAs, of all the different components of CAs the share of inventories in total assets, on an average, is largest followed by receivable and cash in most of the selected enterprises.

iv)

The economics of scale have been highest for inventories followed by cash and gross WC, receivable and Net WC.

v)

The regression results also shown that the level of WC and its components and enterprises desire to hold depend not on sales but on holding costs also.

His study is concerned with interrelationships that exist between managing CAs and CLs. The study manages to focus on Networking Capital Concept. The study has employed ratio analysis discriminate analysis and econometric models for its analysis. This study does not cover all the PEs in manufacturing sector. Each selected enterprises does not represent the entire industry in which it falls. The manufacturing PEs selected for the study differs in its working and nature. These 29

studies show that WC management is the weakest or neglected part of financial management in most of the PEs in Neal. It seems that Nepalese firms are fallowing conservative approach in financing as well as investing working capital. 2.8 Review of Dissertations Besides review of available books and research studies a number of studies have been made by students of MBS and MBA reality to working capital management in different PEs of Nepal. This selection, hence, will review some of those dissertations. Gyawali (2013) in this study entitled "Working capital management of Sumi Distillery PVT LTD." has focused his study on the appropriateness of investment in current assets to its total assets liquidity position management of WC needs and utilization of current assets in SDL. And the major finding of this study area as follow:i.

The company has used the conservative financing polices, where the WC analyzed by taking the position of the current assets. The CAs consists of the inventories, sundry Debtors, cash and bank balances, loan and advances & other assets. The company however following conservative WC policy, there is negative return and positive turnover on net WC.

ii.

The company has used maximum amount of the cash and bank balance in the F/Y 2067/68 during the study period. The investment pattern with respect to CAs to TAs slows the average figure of 76.96% and 71.02% respectively. The lower ratio shows the better management and vice versa.

iii.

The company has faced greater problem of CAs than CLs in every year i.e. from the study period of the thesis writing. The average percentage of net profit is 1.66. Similarly, the company has earned less net profit then the average net profit.

iv.

During the study period the company's current ratio is enough to meet the obligation of 2:1 which is 2.06:1.Which is standard enough.

30

Mahato (2006), in his study "Working Capital Management of Nepal Lever Limited (NLL)" This study has covered the span of five years, Fiscal Year 2000/01 to 2004/05. The objectives of the study were to analysis the liquidity compaction of WC, assets utilization and profitability of NLL, to examine the relationship between liquidity and profitability of NLL and to know whether the NLL has maintained optimum level of WC or not. In his study, the methodologies used are ratio analysis test of hypothesis and correlation analysis and the major findings of his study were as given below: a) The major components of current assets in NLL are inventories, sundry debtors, cash and bank balance and misc. current assets. During the study period, inventing holds the major providing in NLL. It was found that out of total current assets, inventory held the largest portion followed by misc. CA, cash and bank balance and sundry debtors respecting. b) The current ratio of the company ranged in between 1.32 to 2.59 times

during the study period in fluctuation trend. The company was unable to maintain its current ratio of 2:1 in average of the study period. c) The proportion of current assets to net sales varied from 23.46% to 47.39%

during the study period i.e. the current assets investment policy of NLL has been titled towards the related policy. Therefore, it has not proper utilization of CA. d) The major component of CL in NLL is loan and advance, sundry creditors

and misc. CL and provision. During the study it was found that, sundry creditors hold the largest proportion and the loan and advance holds the lowest proportion. e) The average percent of loan and advances sundry creditors and misc. CL and provision are 9.43%, 49.85% and 38.921% respectively. f) Profitability is one of the measures of overall efficiency of the management. The grass profit margin of NLL is in decreasing trend of the

31

study period except of FY 2003/04. It has highest in FY 2002/03and 2003/04 and rest of all FY is less. Thus, NLL should have the proper plan to improve its profitability in future is all so recommended that the volume of sales should be increased and the problem of current assets should be maintained according to its sales volume. Joshi (2013) in his study entitled, "Working Capital Management of Commercial banks of Nepal (with reference to NIBL, EBl, NBL, and HBL) has tried to analyze the management of WC of commercial banks of Nepal. The objectives of these study areas are as follows: i) study factors affecting working capital management and policies adopted by these banks (ii) analysis of liquidity maintenance and efficiency in equity utilization iii) study the relationship between net profit with working capital and debt of the banks. On the basis of his study, the debt capital has been the main source of funds for banks than equity capital while financing the total assets. Among the four selected banks, the preponderance of debt capital is highest in EBL and NABIL, which ultimately has visualized higher risk in total assets in these banks in comparison to other banks. his study found that the short term debt has been used abound than long term debt in meeting the funds requirement. HBL has been found in advanced position in mobilizing highest portion of short term debt, which consequently indicates that the working capital of HBL is most risky. However, all the banks are following aggressive working capital policy. On the basis of highest ratio, his study found that EBL has highest liquidity. The cash reserve ratio is highest in EBL. The other two observed banks have not met the minimum cash reserve ratio as directed by NRB. Thus, it has not been ensured that that the deposits are asylum in the banks. It has found that the relationship between net profit and net working capital is significant, and thus net profit increases/decreases with the increase/decrease in net working capital. Also, the same situation exists between the net profit and short term debt. However, the

32

relationship between net profit and long term debt is positive and significant in NIBL, HBL and EBL. 2.9 Research Gap The above studies are concerned with the research title “Working Capital Management”. Also considering other researchers being carried out on the topic, some researchers have adopted comparative study on more than one Service Company but this study deeply studies on working capital management of Nepal Doorsanchar Company Limited Statistical and financial tools are used to interpret the data available. The study on Service Company in connection to working capital management seems not abundant. Most of the studies have used some financial and statistical tools they have included only summary, findings and conclusion in their study report but no concrete to solve the problems. As stated above, there is very limited study being carried out on working capital management of service companies. Thus to fill this gap, the researchers has aimed to conduct research on working capital management of service company. The study attempts to throw light on working capital position of this company and also suggest the possible measures for the improvement and stepping up the service sector. In this study, latest data is used from FY 2064/65 to FY 2068/69.

33

CHAPTER THREE RESEARCH METHODOLOGY

3.1 Introduction

Research is a systematic and organized effort to investigate a specific problem that needs a solution. In simple, research is a process for searching knowledge and methodology is concerned with the method which is used for research. As a whole, research methodology is a way to systematically solve the problem. It may be understood as a science of studying how research is done scientifically. This study is conducted on the basis of secondary data. The proper analysis of this study can be meaningful only on the right choice of research tools that helps in coming meaningful conclusion. The data is analyzed with the help of both financial and statistical tools. In this Chapter, we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. The main objectives of this study are to analyze the working capital management of Nepal Telecom (Nepal Door Sanchar Company Limited) In this Chapter, the focus has been made on research design, nature and source of data, collection of data, its processing and tools used. 3.2 Research Design In common parlance research design is the conceptual structure within which the research is performed. A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to compare relevance to the research purpose with economy in procedure. Research design constitutes the blue print for collection, measurement and analysis of data. This study continues to evaluate managerial efficiencies and performance to use research design based on description and analytical study. This study attempts to make composition and establish the relationship between two or more variables 34

3.3 Population and Samples There are six telecom companies in Nepal. The total numbers of Telecom operator companies in Nepal are the population of this study and Nepal Telecom as a sample. 3.3.1 Brief Introduction of Nepal Telecom Nepal Doorsanchar Company Limited(Nepal Telecom) was registered on 5th February, 2004 under the existing Companies Act, 2053 and the then Nepal Telecommunications Corporation (NTC) was converted into Nepal Doorsanchar Company Limited(Nepal Telecom) on 13th April, 2004. It has mission of progressive, customer spirited and consumer responsive entity, committed to provide nation-wide reliable telecommunication services to serve as an impetus to the social, political and economic development of the country. Vision of Nepal telecom is to remain a dominant player in telecommunications sector in the country while also extending reliable and cost effective services to all. Goal of Nepal telecom is to provide cost effective telecommunication services to every nook and corner of the country. As a semi-government company, it has central office at Bhadrakali, Kathmandu, 6 regional directorates and district offices under these directorates. Total working manpower of Nepal Telecom is 7185 as of February, 2013. It sales wide ranges of service products from Public Switched Telephone Networks (land-line) to 4G wireless Wi-Max technology. Voice call services it provides are PSTN, NTC GSM postpaid service, Namaste GSM Prepaid service, CDMA fixed C-phone prepaid, CDMA fixed C-phone postpaid, CDMA Sky-Phone prepaid, and CDMA Sky-Phone Postpaid. Data services are GSM (GPRS, EDGE, and 3G), CDMA (2G, 3G), PSTN/ISDN dialup, ADSL, WiMax (4G) services. It has launching 10 million project of GSM 2G and 3G countrywide with the demand of coverage and high speed wireless mobile internet.

35

It has become maximum tax payer of the year many times. The company made the contribution of 18,202,180,715 in government treasury in fiscal year 2068/69 in the name of income tax; value added tax, dividend, license fee, royalty etc. 3.4 Nature and Sources of Data This study is mainly based on the secondary data. Not only this, other information has been collected from internet, published and unpublished materials. The secondary data has been collected from the annual report of NT. In this, data of five different fiscal years has been taken. 3.5 Data Processing Procedures Since the data used in this study are mainly based on the secondary in nature. These secondary data has been collected from the annual report of NT. The annual report includes balance sheet, profit and loss statement, and financial statement. All the available data has been grouped in tables and charts according to their nature and calculated according to the tools. 3.6 Presentation and Analysis of Data The collected data are systematically grouped in table and charts according to their nature, so that it would be easily calculated. Various financial tools and statistical tools are used for calculating the ratios, correlation, co-efficient, probable error, etc. of the collected data. 3.7 Tools of Data Analysis Generally, there are two methods for data analysis, they are: Quantitative and Qualitative method. But in this study, two types of analytical tools are used. They are: (i) Financial Tools and (ii) Statistical Tools. 3.7.1 Financial Tools The ratio analysis is the main tool for analyzing data under financial tools which help to interpret the financial statement of a Company to know its strength and 36

weakness as well as its historical performance so that the current financial condition can be determined. This also helps to conclude how far financial expression is meaningful and to grab the suitable result. Financial ratio analysis is most useful tool which helps us to understand the financial condition and performance of the Company. In order to make rational decisions in keeping with the objectives of the company and its financial viability, an analysis is undertaken by every interested party such as creditors, investors and also by the company itself. Such, analysis varies according to the specific interests of party involved; this analysis is called financial analysis. There are following financial ratios, which can be analyzed to determine financial position of an organization. A. Composition of Working Capital It is studied by analyzing the following ratios: i) Current Assets to Total Assets (CATA) The ratio of current assets to total assets indicates what percentages of the company’s total assets are invested in the form of current assets. It is calculated as:

CATA=

urrent ssets otal ssets

As the ratio increases, the risk and profitability of the company would decrease. The low ratio indicates the small amount of working capital. ii) Current Assets to Fixed Assets (CAFA): This ratio shows the relationship between the current assets and fixed Assets and can be calculated as:

CAFA=

ssets i ed ssets

urrent

37

If the ratio is large, it indicates the sound working capital. iii) Ratio of Cash and Bank Balance to Current Assets (CBBCA): It is calculated as:

CBBCA 

ash

an

alance

urrent ssets



The small ratio indicates the sound management and large ratio vice versa. The working capital is directly affected by it. iv) Cash and Bank Balance to Total Assets (CBBTA): This ratio is calculated as under and indicates what percentage of total assets is invested in cash and bank balance. CBBTA 

ash

an

alance

otal ssets



v) Inventories to Total Assets (ITA): This ratio can be calculated as:

ITA=

Inventory otal ssets

This ratio indicates the percentage of total assets invested in form of invest in the form of inventories. Inventory is a part of working capital so, if the percentage increased the working capital automatically increased. The increase also indicates liberal inventory policy or blocking of materials in stock. vi) Ratio of Inventory to Current Assets (ICA): This ratio implies the percentage of current assets in form of inventory and derived as:

38

ICA=

Inventory urrent ssets

The increase in the ratio is an indication of liberal inventory policy followed by company. If ratio increases or percentage increases means greater part is occupied by inventory. vii) Ratio of Receivables to Total Assets (RTA): This ratio can be calculated as:

RTA=

eceiva les otal ssets

This ratio indicates the percentage of total assets invested in the form of receivables. The increase in the ratio indicates the liberal credit policy followed by

the company. viii) Ratio of Receivables to Current Assets (RCA): This ratio indicates the share of receivables on current assets and is defined as:

RCA=

eceiva les urrent ssets

The low percentage indicates the greater working capital and vice-versa. If the percentage is greater, the firm is unable to collect receivables promptly. B. Liquidity Ratio he liquidity ratio is used to measure the firm’s a ility to meet the short-term obligation and reflect the short-term solvency of the company. There are as follows:

39

i) Current Ratio (CR): Current ratio is the relationship of current assets and current liabilities. The current assets are those assets which can be converted into cash within short period. Current assets normally includes inventories, cash in hand, cash in bank, bills receivable, account receivable, marketable securities, prepaid expenses and loan and advance whereas current liabilities consists of bills payable, account payable, outstanding expenses, cash credit, income tax payable, bank overdraft, current ratio is calculated by dividing the total current assets by total of current liabilities. Thus,

Current Ratio (CR) =

urrent ssets urrent ia ilities

It indicates the firm’s current position, which should e sufficient to cover the current liabilities used by the firm. Higher current ratio shows better liquidity position. For many types of business, 2:1 is considered to be an adequate ratio. If the CR of a firm is less than 2:1, the solvency position of the firm is not good. The cash may not be available to pay current liabilities. Similarly, if the current ratio is more than 2:1, the company may have excessive investment assets that do not produce a return. ii) Quick or Acid-test or Quick Ratio (QR): Quick ratio is calculated by dividing the quick assets by current liabilities. Not all current assets are equally liquid. Inventory and prepaid expenses cannot be termed to be a liquid asset. This asset can be converted into cash immediately as per requirement of company. Therefore, liquid assets mean current assets after deducting inventory.

Quick Ratio (QR) =

urrent ssets-Inventory urrent ia ilities 40

QR =

uic

ssets or iquid ssets urrent ia ilities

Generally, the quick ratio of 1:1 of company is considered to be satisfactory. iii) Cash Ratio: Cash ratio is calculated by dividing cash and marketable securities by current liabilities.

Cash Ratio =

ash and

ar eta le ecurities

urrent ia ilities

iv) Net Working Capital (NWC) to Current Assets Ratio: This ratio is calculated by dividing net working capital by current assets. Where, net working capital is current assets less current liabilities.

NWC to CA Ratio =

C. Profitability Ratio: The main objective of the company is to earn maximum profit. It is necessary to have enough profit to meet different obligation of the firm. The position of the profitability of the company is analyzed with the help of following ratio: i) Gross Profit Margin (GPM): The gross profit margin ratio expresses the relationship between gross profit and sales. Gross profit is obtained by deducting cost of goods sold from net sales.

GPM =

ross rofit ales

41

The gross profit margin ratio reflects the efficiency with which company produces each unit of product. The higher percentage indicates the better efficiency of the company. ii) Net Profit Margin (NPM): Net profit margin is calculated by dividing net profit by sales. Net profit is obtained after deducting operating expenses and income tax from gross profit.

NPM =

et rofit after a ales

his ratio is the overall measurement of the company’s a ility to earn net profit. higher ratio is an indication of the higher overall efficiency of the business and better utilization of total resources. Poor financial planning and low efficiency is the indication of lower ratio. iii) Operating Ratio (OR): The operating ratio is an important ratio that explains the changes in the net profit margin ratio. It shows the relationship between operating expenses and sales. It is calculated by dividing the total operating expenses by sales.

OR =

ost of ood old

petatin

penses

ales

Higher ratio indicates the lower efficiency of the company and vice versa. Higher operation ratio means small amount of operating income to meet interest, dividends, etc. iv) Return on Assets (ROA): Return on assets is expressed as the relationship between net profit after taxes plus interest and total assets. It measures the profitability of total fund of investment of

42

the firm. But it is not sufficient for the analysis as profitability of different sources of fund for financing the total assets. It is computed by dividing net profit after tax by total assets.

ROA =

et rofit after a otal ssets

v) Return on Net Worth (RONW): RONW is computed by dividing net profit after tax by net worth. It is also known as capital employed.

RONW =

et rofit after a et

orth

It indicates the return to the shareholders, how well the firm has used the resources of the owners. It judges whether the firm has earned of satisfactory return for its shareholders or not. Higher the ratio higher the return to the shareholder will be and vice-versa. vi) Return on Working Capital (ROWC): It is computed by dividing net profit after tax by current assets working capital. It measures the profit width respect to current assets.

ROWC =

et rofit after a urrent ssets

Higher the ratio, higher will be the utilization of current assets to earn profit and vice-versa. D. Turnover Ratio: Turnover ratio indicates the relationship between sales and assets. It is also known as activity, efficiency or assets utilization ratio. This ratio shows efficiency of 43

asset management, i.e. how efficient the asset management is? It means how efficiently and rapidly firm can convert its assets into sales. The greater turnover ratio indicates higher utilization of assets. Thus, it measures the degrees of effectiveness in use of resources or fund by a firm. There are following turnover ratios that can be calculated. i)

Working Capital Turnover (WCT): It is computed by dividing sales by net working capital, i.e. different of current assets and current liabilities.

WCT =

ales et

or in

apital

More ratio show the utilization of net working capital and vice-versa. ii)

Inventory Turnover Ratio (ITR): ITR measures how quickly inventory can be converted into sales. It is the test

of efficient inventory management. It is computed by

dividing sales by inventory. It is also computed by dividing cost of goods sold by average inventory.

ITR =

ales Inventory

or, ITR =

ost of oods old vera e Inventory

This ratio shows the number of time inventory is replaced during the year. Higher inventory turnover indicates the good inventory management and lower turnover suggests the management should manage its inventory properly.

44

iii)

Receivables Turnover Ratio (RTR): RTR shows the relationship between credit sales and account receivables of the company. It is also known as debtor turnover ratio. It indicates the velocity of debt collection of the firm.

RTR =

redit ales ccount eceiva les

It indicates the number of times the receivables are turned over during the year. It gives the general measure of the productivity of the receivables investment. The higher ratio indicates the higher amount of working capital and lower ratio vice-versa. For the complimentary of this ratio, there is ratio called average collection

to collect amount receivables. It is computed by dividing

days in a year by receivables turnover. ACP is also known as Day Sales Outstanding (DSO).

ACP =

ays in a ear eceiva le urnover

Or, ACP =

iv)

eceiva les vera e ales per ay

=

eceiva les ales

Cash and Bank Balance Turnover Ratio: It shows the effectiveness of management on management in case of application of cash in ordinary course of business. It measures how rapidly cash can be converted into sales in the company. It is calculated by dividing sales by cash and bank balance. ash and an

alance urnover atio

45

ales ash and an

alance

The higher ratio indicates, cash is rapidly converted in sales and good cash management whereas low ratio indicates slow, weak cash management. E. Cash Conversion Cycle ash flow concept is used for analyzin the effectiveness of a firm’s wor in capital management. The cash conversion cycle model reflects the length of time between when the company makes payments and when it receives cash. The following terms in this model: 1. Inventory Conversion Period This period indicates the average length of time required to convert materials into finished goods and then to sell those goods. It is calculated by divided inventory on hand by cost of goods sold per day. Inventory onversion eriod

Inventory o

2. Receivable Collection Period This period determines the average length of time required to convert receivables into cash that is to collect cash following a sale. It is calculated by dividing accounts receivable by the average credit sales per day.

eceiva le ollection eriod

eceiva le ales

3. Payables Deferral Period The payable deferral period is the average length of time between the purchase of materials and labor and the payment of cash for them. This period is calculated as: aya les eferral eriod

46

aya les ost of oods old

4. Cash Conversion Cycle The cash conversion cycle nets out the three periods just defined and thus equal the len th of time etween the firm’s actual cash e penditures for productive resources and its own cash receipts from the sale of products. The cash conversion cycle equals the average length of time cash is tied up in current assets. Cash conversion cycle is calculated as: Inventory onversion eriod

eceiva le onversion eriod

aya les eferral eriod F. Leverage Ratio: Leverage ratio or capital structure ratio are also known as long-term solvency ratio. Leverage ratios are used to measure the financial risk and to know that how the firm fares is using its debt for the benefits of shareholders. Leverage ratio also reflects the proportion of debt in total financing. There are different leverage ratios. Out of them, only two important ratios are given below: i)

Short-term Financing (STF) to Long-term Financing (LTF) Ratio: This ratio is computed by dividing short-term financing amount by the long-term financing. Fund raised from short-term financing can be used to increase current asset, to meet daily expenses. atio

ii)

Short-term Financing (STF) to Total Financing (TF) Ratio: This ratio shows the proportion of short-term financing out of total financing

amount. This ratio is computed by dividing short-term

financing by total financing. If a firm uses more short-term financing then an aggressive policy is said to be followed by the firm. atio

47

3.7.2 Statistical Tools: The statistical tools are essential to measure the relationship of two or more variables. The statistical tools are as follows: i) Coefficient of Correlation or Covariance Method: Coefficient of correlation is defined as the association between the dependent variables and independent variables. It is a method of determining the relationship between these two variables. If the two variables are so related the change in the value of dependent variable, then it is said to have correlation coefficient. For this, the method of Karl earson’s coefficient of correlation is used: ∑ d dy

r √[∑ d

(∑ d )

∑ d ∑ dy ] [∑ dy

(∑ dy)

]

Where, x = The First Variable, y = The Second Variable, N = Number of Years (Observations), dx = Deviation of first variable from assumed mean, dy = Deviation of second variable from assumed mean. Assumption: i) If r = 0, there is no relationship between the variables. ii) If r < 0, there is negative relationship between the variables. iii) If r > 0, there is positive relationship between the variables. iv) If r = +1, the relationship is perfectly positive. v) If r = -1, the relationship is perfectly negative.

48

ii) Probable Error (P.E.):

P.E. of r is very useful in interpreting the value of r and is worked out as under for Karl earson’s oefficient of orrelation. . .

.

( r) √

If r < P.E., it is not all significant, no evidence of correlation between variables. If r > P.E., there is no correlation, but not significant. If r > 6P.E. and greater than ±0.5, it is considered significant at all. Trend Analysis: The trend line describes the average relationship between the two series. In fact, there is no difference between the lines of the best fit and the regression lines through the term line of the best fit is generally used when x series related to time and y series to term line of the value of the variable. If both x and y series are variable, the lines of best fit are known as line of regression. The equation describing the regression lines is called regression equation. a Where, Y = The estimated value of y for given value of x obtained from the line of regression of y on x. A = y intercept/or mean of y value B = slope of trend line/ rate of change x = the variable in time series analysis represent time a

∑y n ∑ y ∑

49

Where, a= regression Constant b= regression Coefficient of change ∑ y = the total value of dependent variable ∑ y =the total value of the product of items in the two series ∑

= the total of the sum of times in x series

Here, the trend analysis of Sales, Inventory, Current Assets and Current Liabilities are done by using upper formula.

50

CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA 4.1 Introduction This is the main chapter of the study. This is the most important sensitive part of this study because it consists of analysis and presentation of empirical data focus in how far the NT is position to manage their working capital. In order to examine the working capital management of this telecom operator, the necessary financial facts and figures as well as descriptive information has been gathered through the financial statement (annual). These collected data has been calculated using various financial and statistical tools. The major variables are current assets, current liabilities, quick assets, Revenue, cost of goods (service) sold, long-term debt etc. This chapter will present the analysis of various components of working capital of this Company, which includes size, structure and utilization of current assets, liquidity and profitability position, relation between current assets and total assets as well as fixed assets, sources and application of fund and management of current assets. 4.2 Position of Current Assets: As current assets are the main parts which are required to run day to day business activities and total of this is known as working capital as the gross concept. Its position has become needful to study. Most of the business organizations require some amount of working capital and its requirement differ according to the size of the organization. A service firm needs cash to purchase equipments, spare parts and pay expenses this is because of not perfect matching between cash inflow and outflow. Cash is also needed to meet the future expenses. The timely procurement of equipments of the project, spare parts are kept in order to ensure smooth service delivery and to protect the risk of non-availability of demand based quality service and benefit to competitor. To meet this obligation also cash is needed. Any business organization aims to maximize return on shareholders' investment. In 51

order to accomplish this objective the business organization should earn sufficient return for its operations. Earning a steady amount of profit requires successful sales. So, the firm has to invest enough funds in current assets for the success of sale. As the sale do not converted into cash instantly the extra amount of working capital is needed. The efficient management of current assets is an integral impact on maximization of owner’s capital in this context, it is necessary to have proper analysis for current assets management. The proper analysis of current assets of industrial concern reflects the nature and operation of its management. So, the overall current assets are firstly analyzed.

52

Table 4.1 Position of Current Assets (Rs in Millions) Cash & Bank

Sundry Debtors

Inventory

%

Amount

%

2064/65

16134.52

64.54

3318.46

13.27

416.42

1.67

5131.07

20.52

0.00

0.00

25000.47

2065/66

18191.06

63.08

3593.21

12.46

180.13

0.62

6872.90

23.83

0.00

0.00

28837.30

2066/67

21611.54

61.72

4296.00

12.27

172.27

0.49

8935.56

25.52

0.00

0.00

35015.36

2067/68

16769.20

43.57

3904.74

10.14

958.05

2.49

16857.54

43.80

0.00

0.00

38489.55

2068/69

25220.62

47.36

4339.42

8.15

1049.69

1.97

22421.60

42.10

224.82

0.42

53256.15

0.08

36119.77

11.26

1.45

Source: Annual Report of NT

53

Amount

%

31.16

Amount

Total C.A.

Amount

56.05

%

Investments

Fiscal Year

Average

Amount

Advance Deposits

%

The above table represents current asset’s position of NT. It also represents investment pattern of this company in current assets and their fluctuations in years. In FY 2064/65 NT current assets is Rs. 25000.47 millions and next year it is increase in FY 2065/66 which is Rs. 28837.3 millions then it increase to Rs. 35015.36 in FY 2066/67. NT’s Current assets remains continuously increasing in FY 2067/68 and FY 2068/69 which are Rs. 38489.55 and Rs. 53256.15 millions accordingly. 4.3 Composition of Working Capital (Financial Ratio) Analysis: The compositions of working capital are analyzed with the following ratios: 4.3.1 Proportion of Current Assets to Total Assets: The necessity of current assets depends upon the nature of the business. It is required to meet the working capital, which is required to run the organization’s day to day activities. The table given below represents the percentage of current assets to total assets. Table 4.2 Current Assets and Total Assets (Rs. In Millions) Fiscal Year

Current Assets

Total Assets

Ratio

2064/65

25000.47

38675.47

64.64%

2065/66

28837.30

46280.63

62.31%

2066/67

35015.36

52504.65

66.69%

2067/68

38489.55

76021.56

50.63%

2068/69

53256.15

105918.33

50.28%

r=0.98

P.E.=0.01

Source: Annual Report of NT This ratio represents the proportion of current assets investment to total assets investment of NT for the selected years of study period. The overall proportion of

54

current assets on total assets is fluctuating year after year. In the fiscal year 2064/65, current assets absorb 64.64 % of total assets, which has slightly decreased in 2065/66 by 2.33% i.e. 62.31%. But in fiscal year 2066/67, the percentage of current assets to total assets has increased to 66.69%. This is the highest absorption of C.A. to T.A. during study period. This is due to increase in all types of current assets except inventory. In next fiscal year 2067/68, it has drastically decreased by 16.06% being 50.63%. In last study period, in fiscal year 2068/69 it has decreased to 50.28%. So, we can say that the proportion of current assets to total assets is fluctuating in first three year and then decreasing; this is due to fluctuation in current assets. The above calculation shows that there is positive correlation between current assets and total assets of the company during the five study period. Further, the value of ‘r’ is far greater than its P.E., the relationship is considered to be significant. 4.3.2 Proportion of Current Assets to Fixed Assets: For the purpose of success of any service concerns, firm should invest in current assets as well as fixed assets to supports a particular level of return. Therefore, the company should determine the proper position of current assets with fixed and total assets. The level of current assets can be measured by relationship between current assets to fixed assets, which can help to find the current assets investment policy. Assuming a constant level of fixed assets, higher current assets to fixed assets ratio indicates an aggression. Current assets policy conversely lower ratio indicates the conservative current assets policy. If the company increase the proportion of current assets there is the high probability of return as well as risk, vice-versa if decrease than it may be low risk and return.

55

Table 4.3 Current Assets to Fixed Asset (Rs. In Millions) Fiscal Year

Current Assets

Fixed Assets

Ratio

2064/65

25000.47

25193.71

0.99

2065/66

28837.30

29849.39

0.97

2066/67

35015.36

31150.35

1.12

2067/68

38489.55

45642.52

0.84

2068/69

53256.15

52662.18

1.01

r=0.94

P.E.=0.04

Source: Annual Report of NT In the above table, ratio of current assets to fixed assets of NDCL of five different fiscal years has been presented. During the five study year, the current assets to fixed assets are being fluctuated. The investment in fixed assets is less than that in current assets in fiscal year 2066/67 and 2068/69. In fiscal year 2066/67, the ratio is 1.12 and in 2068/69, it is 1.01. The ratio is 0.99 in fiscal year 2064/65 and decrease to 0.97 in fiscal year 2065/66. It is lowest in fiscal year 2067/68 and is 0.84. Overall this shows that the company has adopted the more aggressive current assets investment policy. In the above table, the correlation coefficient (r) between current assets and fixed assets during the study period of the NDCL has shown which is positive and high. This shows that positive correlation between current assets and fixed assets. Since, ‘r’ is more than six times greater than P.E.; the relationship is considered to be more significant. 4.3.3 Proportion of Cash and Bank Balance to Current Assets: The main reason of holding the cash is for transaction motive, precautionary motive and speculative motive. So, to fulfill the daily business requirement such as payment of bills, payment of debt, optimum cash balance or bank balance has to be maintained. The below table shows the proportion of cash to current assets:

56

Table 4.4 Cash and Bank Balance to Current Assets (Rs. In Millions) Fiscal year

Cash & Bank Balance

Current Assets

Ratio

2064/65

16,135

25000.47

64.54%

2065/66

18,191

28837.30

63.08%

2066/67

21,612

35015.36

61.72%

2067/68

16,769

38489.55

43.57%

2068/69

25,221

53256.15

47.36%

r=0.82 Source: Annual Report of NT

P.E.=0.10

The above table shows that the proportion of cash to current assets is continuously decreasing due to more increase in Current assets then cash and bank balance in later years. It is 64.54% in the fiscal year 2064/65. The cash hold by the Company in this fiscal year is Rs. 16,135 Millions. Likewise, the cash hold by the company in fiscal year 2065/66 is Rs. 18,191 Million which is 63.08 percent of its total current assets. The proportion in the fiscal year 2066/67 is 61.72% which has decreased to 43.57% in the next fiscal year 2067/68. And in fiscal year 2068/69 the proportion is increase to 47.36% In the above calculation, correlation coefficient ‘r’ is positive. So, there is positive correlation between cash and current assets during the study year. But, the calculated value of ‘r’ is more than six times greater than P.E., it is considered to be highly significant. 4.3.4 Proportion of Cash & Bank Balance to Total Assets: The proportion of liquid cash in comparison to the total assets shares the investment in cash out of total assets. The more ratio decrease the risk and provide nothing, the profitability would decrease. The below table shows the percentage of Cash & Bank Balance to Total Assets:

57

Table 4.5 Cash and Bank Balance to Total Assets (Rs. In Millions) Fiscal Year

Cash & Bank Balance

Total Assets

Ratio

2064/65

16134.52

38675.47

41.72%

2065/66

18191.06

46280.63

39.31%

2066/67

21611.54

52504.65

41.16%

2067/68

16769.20

76021.56

22.06%

2068/69

25220.62

105918.33

23.81%

Average

19585.39

63880.13

33.61%

Source: Annual Report of NT The above table shows the investment in cash out of its total assets in NDCL. During the period of study of five years. In the fiscal year 2064/65, the proportion is 41.72% which is the highest during the five study year has fallen down to 39.31% in the next fiscal year 2065/66. In fiscal year 2066/67 it has increased to 41.16%. Again, it has decreased to 22.06% in fiscal year 2067/68 and in fiscal year 2068/69, it is 23.81% respectively. The proportion of 22.06% in fiscal year 2067/68 is the lowest among the five study year. 4.3.5 Proportion of Inventory to Total Assets: Inventory takes little contribution in current assets for service organization like NDCL. It has lower effect on the total assets. The below table shows the proportion of inventories and total assets:

58

Table 4.6 Inventory to Total Assets (Rs. In Millions) Fiscal Year

Inventory

Total Assets

Ratio

2064/65

416.42

38675.47

1.08%

2065/66

180.13

46280.63

0.39%

2066/67

172.27

52504.65

0.33%

2067/68

958.05

76021.56

1.26%

2068/69

1049.69

105918.33

0.99%

Average

555.31

63880.13

0.81%

r=0.87 Source: Annual Report of NT

P.E.=0.07

The above table shows the proportion between inventories and total assets during study year. In fiscal year 2064/65, the proportion is 1.08%. It has decreased to 0.39% in fiscal year 2065/66. In fiscal year 2066/67, it has fall down to 0.33% which is the lowest among the study years. Again it has increased respectively to 1.26%, which is the highest ratio among the study years. It is 0.99% in fiscal years 2068/69. In the above calculation, correlation coefficient between inventories and total assets is positive. So, there is positive relation between them. Also, r is greater than PE but it is six times greater than PE. Therefore, the relationship is considered significant. 4.3.6 Proportion of Inventory to Current Assets: One of the less important parts of current assets is inventory for service organization like NDCL. Main component of inventory for this company are Sim/Ruim Cards, Telephone Sets, Spare parts of the System Equipment which is lower in amount but plays important role for uninterrupted system operation and communication services.

59

Table 4.7 Inventory to Current Assets (Rs. In Millions) Fiscal Year Inventory Current Assets 2064/65 416.42 25000.47 2065/66 180.13 28837.30 2066/67 172.27 35015.36 2067/68 958.05 38489.55 2068/69 1049.69 53256.15 Average 555.31 36119.77 r=0.77 P.E.=0.12 Source: Annual Report of NT

Ratio 1.67% 0.62% 0.49% 2.49% 1.97% 1.45%

In the above table, the proportion of inventory to current assets during the study year has been calculated. In the fiscal year 2064/65, it is 1.67%. In fiscal year 2065/66, it has fallen to 0.62%. In 2066/67, it has lowest ratio of 0.49% among the study year. And it has increased to 2.49% in fiscal year 2067/68, which is the highest among the study years and 1.97% in F/Y 2068/69 respectively. In the above calculation, correlation coefficient of Inventory and current assets is positive. So, there is positive correlation between them. Since, the calculated value of ‘r’ is more than six times greater than PE. So, it is considered to be significant. 4.3.7 Proportion of Receivables to Total Assets: Table 4.8 Receivables to Total Assets (Rs. In Millions) Fiscal Year Receivables Total Assets 2064/65 3318.46 38675.47 2065/66 3593.21 46280.63 2066/67 4296.00 52504.65 2067/68 3904.74 76021.56 2068/69 4339.42 105918.33 Average 3890.37 63880.13 Source: Annual Report of NT

60

Ratio 8.58% 7.76% 8.18% 5.14% 4.10% 6.75%

In above table, the proportion of receivables to total assets is 8.58% in the fiscal year 2064/65 which is the highest among five study years. It has decreased by 0.82% in fiscal year 2065/66 to reach 7.76%. It has increased to 8.18% in fiscal year 2066/67. In 2067/68, it has decreased to 5.14%. The lowest ratio of five study year is 4.10% which is in F/Y 2068/69. 4.3.8 Proportion of Receivables to Current Assets: The table below shows the proportion of receivables to current assets. Table 4.9 Receivables to Current Assets (Rs. In Millions) Fiscal Year

Receivables

Current Assets

Ratio

2064/65

3318.46

25000.47

13.27%

2065/66

3593.21

28837.30

12.46%

2066/67

4296.00

35015.36

12.27%

2067/68

3904.74

38489.55

10.14%

2068/69

4339.42

53256.15

8.15%

Average

3890.37

36119.77

11.26%

Source: Annual Report of NT In the above table, the proportion of receivables to current assets is 13.27% in fiscal year 2064/65. In year 2065/66, it has decreased to 12.46%. Next, it has decreased to 12.27% in fiscal year 2066/67. Fiscal year 2067/68 has 10.14%. And in year 2010/11 it is 8.15%. 4.4 Liquidity Position: Liquidity position shows the ability to pay the bills. Liquidity fulfills the current need of money. Since, the study is focused on working capital management of the company. So, liquidity position plays vital role to manage the working capital. Here, the current ratio, quick ratio, cash ratio and working capital to current assets ratio of NDCL during five years period of study are observed. 61

4.4.1 Current Ratio: It is the simple relationship of current assets to current liabilities current assets includes cash and bank balance, inventory, receivables and other miscellaneous current assets, whereas current liabilities include creditors, cash credit taken, provision for taxation, unclaimed dividend and other miscellaneous current liabilities. The current ratio of the company for the period of study is calculated in the table below. Table 4.10 Current Ratio (Rs. In million, Ratio in Times) Fiscal Year

Current Assets

Current liab.

Ratio

2064/65

25000.47

6478.04

3.86

2065/66

28837.30

6718.05

4.29

2066/67

35015.36

6929.34

5.05

2067/68

38489.55

7858.02

4.90

2068/69

53256.15

10757.85

4.95

Average

36119.77

7748.26

4.61

r=0.97

P.E.=0.02

Source: Annual Report of NT The above table shows that company’s average current ratio during study year is 4.61:1. It shows that company has enough current assets to pay current obligations i.e. no shortage of current assets. Because the standard current ratio is 2:1 and here average is 4.61:1 which are quite high. In the fiscal year 2064/65 it has 3.86:1 ratio which is the lowest of five study years. In fiscal year 2065/66 it has ratio of 4.29:1. In F/Y 2066/67 it is 5.05:1 which shows that it has kept high current assets then current liabilities. And in fiscal year 2067/68 and 2068/69, it has ratio of 4.90:1 and 4.95:1 respectively. Overall the company has maintained the higher than standard current ratio.

62

The above calculation shows that, correlation coefficient between current assets and current liabilities ‘r’ during the study period is positive therefore there is positive correlation between them. Since, the calculated value of ‘r’ is six times more than of PE, it is considered to be significant. 4.4.2 Quick Ratio (Acid Test Ratio): Quick ratio or acid test ratio is the relationship in between quick assets and current liabilities. It is the measurement of company’s ability to convert its current assets, quickly into cash in order to meet its current liabilities. The inventory, which can’t convert quickly into cash so, the study of quick ratio is reliable. It can be computed by dividing quick assets by current liabilities. The quick ratio of NDCL during the study period is presented below. Table 4.12 Quick Ratio (Rs. In million, Ratio in Times) Fiscal Year

Quick Assets

Current liab.

Ratio

2064/65

24,584

6478.04

3.79

2065/66

28,657

6718.05

4.27

2066/67

34,843

6929.34

5.03

2067/68

29,421

7858.02

3.74

2068/69

52,206

10757.85

4.85

Total

169,712

38741.31

21.69

Average

33,942

7748.26

4.34

r=0.93

P.E.=0.04

Source: Annual Report of NT In the above table, the calculated average quick ratio is 4.34:1 which is considered to be very good because the perfect quick ratio is 1:1. During the five study period the quick ratio has low fluctuation. It ranges from 3.74 to 5.03. In the fiscal year 2064/65 it has ratio of 3.79:1. In fiscal year 2065/66 it has ratio of 4.27:1. NDCL has highest quick ratio in F/Y 2066/67 which is 5.03 and lowest in F/Y 2067/68

63

i.e., 3.47. As in the above calculation, the correlation coefficient ‘r’ is positive so there is positive correlation between quick assets and current liabilities during the study period. And also ‘r’ is far greater than PE; it is considered that the relationship is highly significant. 4.4.3 Cash Ratio: Cash ratio is the relationship between cash and marketable securities and current liabilities. Cash is the important current assets to run any firm. So, the firm should manage the amount of cash in proper way. The below table shows the relationship between cash & marketable securities and current liabilities. Table 4.12 Cash Ratio (Rs. In millions) Fiscal Year

Cash & Marketable Securities)

2064/65

16,135

6478.04

2.49

2065/66

18,191

6718.05

2.71

2066/67

21,612

6929.34

3.12

2067/68

16,769

7858.02

2.13

2068/69

25,221

10757.85

2.34

Total

97,927

38741.31

12.80

Average

19,585

7748.26

2.56

r=0.78

Current liab. Ratio

P.E.=0.12

Source: Annual Report of NT The above table shows the cash ratio during five study years which has fluctuation from 2.13% to 3.12%. In the fiscal year 2064/65 it has 2.49%. Next fiscal it has increased to 2.71%. In fiscal year 2066/67 it has highest ratio of 3.12% which has fallen to 2.13% in fiscal year 2067/68. And in fiscal year 2068/69 it has ratio of 2.34%. In the above table, there is positive correlation coefficient ‘r’, so there is positive relationship between cash & marketable securities to current liabilities.

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Since, ‘r’ is six times greater than PE; it is considered that relationship is significant. 4.4.4 Working Capital to Current Assets Ratio: This ratio shows the relationship between working capital and current assets. Here, working capital means net working capital. Net working capital is current assets less current liabilities. The table below shows the relationship between working capital and current assets. Table 4.13 Working Cap. To Current Assets (Rs. In millions) Fiscal Year

Working Capital

Current Assets

Ratio

2064/65

18522.43

25000.47

74.09%

2065/66

22119.24

28837.30

76.70%

2066/67

28086.03

35015.36

80.21%

2067/68

30631.53

38489.55

79.58%

2068/69

42498.30

53256.15

79.80%

Total

141857.52

180598.83

390%

Average

28371.50

36119.77

78%

r=1

P.E.=0

Source: Annual Report of NT In the above table, the relationship between working capital and current assets is 74.09% in the fiscal year 2064/65 which has risen to 76.70% in fiscal year 2065/66. In fiscal year 2066/67 it has highest ratio with 80.21% among the study year. It has decreased to 79.58% in fiscal year 2067/68. In fiscal year 2068/69 it has 79.80%. In the above figure, correlation coefficient ‘r’ is one. Hence, there is perfectly positive correlation between working capital and current assets. It is considered that the relationship is perfectly positive.

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4.5 Profitability Position: Behind the establishment of a company, there is objective of earning profit or getting maximum return on investment. Profitability of company is concern with all parties of the country. Effective utilization of resources to earn maximum amount profit is the basic through of company. Profitability is the measure of efficiency. To measure the profitability position of the NDCL, the researcher has tried to analyze the profitability ratio, such as: gross profit margin, net profit margin, operating ratio, return on assets, return on net working capital and return on working capital. 4.5.1 Gross Profit Margin (GPM): It is the profit of excluding the deduction of operating expenses and income tax. It is obtained by deducting cost of services sold from net sales revenue. The ratio is the relationship between gross profits to net Revenue which explains that percentage return of gross profit out of total assets. The ratio measure the efficiency of company and soundness of management. Higher percentage indicates the better efficiency. The below table shows the gross profit earned by the company during period of study and Revenue made there off. Table 4.14 Gross Profit Margin (Rs. In Millions) Fiscal Year

Gross Profit(Loss)

Revenue

Ratio

2064/65

10707.31

16694.26

64.14%

2065/66

13633.99

20628.95

66.09%

2066/67

14441.10

25058.30

57.63%

2067/68

16389.64

26406.99

62.07%

2068/69

15617.19

32798.05

47.62%

Total

70789.22

121586.56

297.54%

Average

14157.84

24317.31

59.51%

r=0.85 Source: Annual Report of NT

P.E.=0.08

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In the above table gross profit margin of the firm during the five study years are shown which is quite fluctuating. The firm has gross profit during all five studies. In fiscal year 2064/65, it has gross profit margin of 64.14% i.e. gross profit. It is increases to 66.09% in fiscal year 2065/66 which is the highest gross profit among the study year. In next fiscal year 2066/67, it has fallen to 57.63% and increases to 62.07% in fiscal year 2067/68. In fiscal year 2068/69 it has decreased to 47.62%. The above calculation shows the positive relationship between gross profit and Revenue because the correlation coefficient between them is positive. Hence, ‘r’ is six times greater than PE, the relationship is considered to be significant. 4.5.2 Net Profit Margin (NPM): Net profit is the profit which comes after deducting operating expenses and income tax from gross profit. This ratio is the relationship on net profit after tax to sales revenue. This ratio shows the ability of management to operate business with sufficient success. The ratio of net profit to sales revenue essentially expresses the cost price effectiveness of the operation. The operating expenses mainly affect the net profit of company. The table below shows the net profit margin of NDCL during the study period. Table 4.15 Net Profit Margin (Rs. In Millions) Fiscal Year

Net Profit after tax(Loss)

Revenue

Ratio

2064/65

7778.75

16694.26

46.60%

2065/66

10178.02

20628.95

49.34%

2066/67

10775.15

25058.30

43.00%

2067/68

12120.30

26406.99

45.90%

2068/69

11605.27

32798.05

35.38%

Total

52457.50

121586.56

220.22%

Average

10491.50

24317.31

44.04%

r=0.85 Source: Annual Report of NT

P.E.=0.09

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The above table shows the net profit margin of NDCL during five study years. The average net profit margin of the firm is positive. It tells that the Company is able to obtain profit after the payment of tax for the five study year. In fiscal year 2064/65, it has 46.60% net profit margin which is increases to 49.34% in fiscal year 2065/66, the highest among the studied years. It has reduced to 43.00% in fiscal year 2066/67and increases to 45.90% in fiscal year 2067/68. In fiscal year 2068/69, it is 35.38%. In the above calculation, correlation coefficient ‘r’ between net profit after tax and Revenue is positive. Therefore, the relationship is positively correlated. Hence, ‘r’ is six times greater than PE, the relationship is considered as significant. 4.5.3 Operating Ratio (OR): The operating ratio establishes the relationship between total operating expenses and Revenue volume. It is an important ratio that explains the changes in the net profit margin ratio. It also measures the efficiency of the company as regards to minimizing costs. Operating ratio is an indicator of operational efficiency. The table below shows the operating ratio of the NDCL during the period of study. Table 4.16 Operating Ratio (Rs. In Millions) Fiscal Year

Cost of goods sold + Operating expenses

2064/65 2065/66 2066/67 2067/68 2068/69 Total Average

5986.95 6994.96 10617.21 10017.35 17180.87 50797.34 10159.47

Revenue

Ratio

16694.26 35.86% 20628.95 33.91% 25058.30 42.37% 26406.99 37.93% 32798.05 52.38% 121586.56 202.46% 24317.31 40.49% P.E= 0.02

r=0.96 Source: Annual Report of NT

The above table shows that in the operating ratio is 35.86% in the fiscal year 2064/65. Then it has decreased to 33.91% and increased to 42.37% in fiscal year

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2065/66 and 2066/67 respectively. And in fiscal year 2067/68 it has decreased to 37.93%. It has highest ratio in fiscal year 2068/69 reaching 52.38%. Overall the operating ratio of the firm is considered to be good one. In the above calculation, the correlation coefficient ‘r’ is positive therefore relationship between COGS and operation expenses to Revenue is positive. Hence, ‘r’ is six times greater the value of PE, the relationship is considered to be significant. 4.5.4 Return on Assets (ROA): It measures the percentage of return on the overall total assets employed for every activities of the company. It gives the profit giving efficiency of the company in relation to total assets. The return on total assets of NDCL is presented below in the table during the period of study. Table 4.17 Return on Assets (Rs. In Millions) Fiscal Year

Net Profit after tax(Loss)

Total Assets

Ratio

2064/65

7778.75

38675.47

20.11%

2065/66

10178.02

46280.63

21.99%

2066/67

10775.15

52504.65

20.52%

2067/68

12120.30

76021.56

15.94%

2068/69

11605.27

105918.33

10.96%

Total

52457.50

319400.63

89.53%

Average

10491.50

63880.13

17.91%

r=0.74

P.E.=0.14

Source: Annual Report of NT In the above table, the return on assets for five study year is shown. The average ratio is positive, it shows that the firm has return in the total assets used and is higher. The firm has best return in the fiscal year 2065/66 among the study year of 21.99%. And in fiscal year 2068/69 it has lowest of 10.96%. Overall the company

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is able to get higher return in total assets as a whole during the five study year. The above calculation shows that the correlation coefficient between net profit after tax and total assets is positive. So they have positive relationship. Hence, the value of ‘r’ is not six times greater than the value of PE; the relationship is considered as not significant. 4.5.5 Return on Net Worth (RONW): It gives the percentage return on the owner’s capital invested. The conclusions drawn on the basis of preceding ratios may not give true result because they give profit in sales and total assets i.e. net worth needful to study. The table presented below shows the ratio of return on owner’s capital employed during the period of study of NDCL. Table 4.18 Return on Net Worth (Rs. In Millions) Fiscal Year

Net Profit after tax(Loss)

Net Worth

Ratio

2064/65

7778.75

35343.89

22.01%

2065/66

10178.02

41629.02

24.45%

2066/67

10775.15

47149.60

22.85%

2067/68

12120.30

45296.46

26.76%

2068/69

11605.27

49474.56

23.46%

Total

52457.50

218893.53

119.53%

Average

10491.50

43778.71

23.91%

r=0.89

P.E.=0.06

Source: Annual Report of NT The above table shows the relationship between NPAT with net worth. In the fiscal year 2064/65, it has ratio of 22.01% which has increases to 24.45% in fiscal year 2065/66 and in 2066/67 it is 22.85%. In fiscal year 2067/68, it has highest of five study year which is 26.76%. It has ratio of 23.46% in fiscal year 2068/69.

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Overall the calculation shows that the return on net worth ratio is remains small fluctuation over five study years. It has fluctuated 22.01% to 26.76%. 4.5.6 Return on Working Capital (ROWC): This is the ratio of return on current assets on working capital employed by the company. It measures the profit with respect to its total current assets. It gives the utilization of current assets effectiveness. The table presented below shows the relationship between net profit after tax and current assets i.e., working capital during the period of study. Table 4.19 Return on Working Capital (Rs. In Millions) Fiscal Year

Net Profit after tax(Loss)

Current Assets

Ratio

2064/65

7778.75

25000.47

31.11%

2065/66

10178.02

28837.30

35.29%

2066/67

10775.15

35015.36

30.77%

2067/68

12120.30

38489.55

31.49%

2068/69

11605.27

53256.15

21.79%

Total

52457.50

180598.83

150.46%

Average

10491.50

36119.77

30.09%

r=0.75

P.E.=0.13

Source: Annual Report of NT The above table shows the relationship between net profit after tax and current assets is 31.11% in fiscal year 2064/65. In fiscal year 2065/66 it has 35.29% return which is the highest ratio over the five study year. In fiscal year 2066/67, it is decreases to 30.77%. Again, it is increases to 31.49% in fiscal year 2067/68. Again, in fiscal year 2068/69, it has decreases to 21.79% which is lowest ratio during the study period. Overall it shows the fluctuating return on working capital ratio. The above calculation shows the correlation coefficient ‘r’ between net profit after tax and current is positive. So, there is positive correlation between

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them. Here, the value of ‘r’ is not six times greater than PE; the relationship is considered to be not significant. 4.6 Turnover Ratio: Turnover ratio indicates the relationship between Revenue and assets. It is also known as activity, efficiency or assets utilization ratio. This ratio measures the

degree of effectiveness in use of resource or fund by a company. Various turnover ratios have been calculated below: 4.6.1 Working Capital Turnover (WCT): It is computed by dividing Revenue by net working capital. Net working capital is excess amount of current assets over current liabilities. Such working capital is the margin of safety maintained by the company. In case of service organization like NDCL, there is sufficient working capital. The net working capital position maintained by the NDCL is presented below. Table 4.20 Working Capital Turnover (Rs. In Millions) Fiscal Year

Revenue

Working Capital

Ratio

2064/65

16694.26

18522.43

0.90

2065/66

20628.95

22119.24

0.93

2066/67

25058.30

28086.03

0.89

2067/68

26406.99

30631.53

0.86

2068/69

32798.05

42498.30

0.77

Total

121586.56

141857.52

4.36

Average

24317.31

28371.50

0.87

r=0.99

P.E.=0.01

Source: Annual Report of NT The above table shows the working capital turnover of the NDCL for the five study period. In fiscal year 2064/65, it has ratio of 0.90 times and in fiscal year 2065/66 it has ratio 0.93 times which is highest among the five studied period. In

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fiscal year 2066/67 it has ratio of 0.89 times which had fall down to 0.86 and 0.77 times in fiscal year 2067/68 and 2068/69 respectively. Overall it has average ratio of 0.87 times during five studied year. The above calculation shows the correlation coefficient ‘r’ of Revenue to net working capital is positive. So there is positive relationship between them. Here, the value of ‘r’ is six times greater than the value of P.E., the relationship is considered to be significant. 4.6.2 Inventory Turnover Ratio (ITR): Inventory is also the one component of current assets which also should be maintained effectively and efficiently. It has already been stated that working capital and Revenue are correlated in general causes. The inventory should be properly maintained to provide service on demand increased to meet the higher level of service Revenue target. Telephone sets drop wire and accessories, Cash cards, Spare and others are major inventory of telecom operator like Nepal Doorsanchar Company Limited. The company should made managerial decision to purchase and maintain proper level of inventory which has no insufficiency of working capital. The below table shows the inventory turnover position of NDCL during the five year study period. Table 4.21 Inventory Turnover Ratio (Rs. In Millions) Fiscal Year

Revenue

Inventory

Ratio

2064/65

16694.26

416.42

40.09

2065/66

20628.95

180.13

114.52

2066/67

25058.30

172.27

145.46

2067/68

26406.99

958.05

27.56

2068/69

32798.05

1049.69

31.25

Total

121586.56

2776.57

358.88

Average

24317.31

555.31

71.78

r=0.7 Source: Annual Report of NT

P.E.=0.15

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The above table shows the inventory turnover of NDCL during the period of study. In fiscal year 2064/65, it has ratio of 40.09 times and risen to 114.52 in fiscal year 2065/66. In fiscal year 2066/67, it has rise to 145.46 times which is the highest among the five study year. Then, it has fallen to 27.56 and 31.25 respectively in fiscal year 2067/68 and 2068/69. The firm has average inventory turnover of 71.78 times during study year. As the above calculation shows that the value of correlation coefficient ‘r’ between Revenue and inventory is positive. So there is positive relationship between them. Here, value of ‘r’ is not more than six times the value of PE; the relationship is not significant. 4.6.3 Receivables Turnover Ratio (RTR): Receivables are one of the components of working capital. In order to increase the business activities the company has to increase the service delivery. General public, Employees, Government companies, Government offices, International and Domestic inter-administration are main of the sundry debtors of NDCL. The Revenue volume can be increased by giving service in credit to the customers. In such case, level of receivables goes up. It is also known as debtors’ turnover ratio. The table presented below shows the receivables turnover position and average collection period of its receivables of the NDCL during the study period. Table 4.22 Receivable Turnover ratio (Rs. In Millions) Fiscal Year

Revenue

Receivables

Ratio

Avg. Collection Period

2064/65

16694.26

3318.46

5.03

72.55

2065/66

20628.95

3593.21

5.74

63.58

2066/67

25058.30

4296.00

5.83

62.58

2067/68

26406.99

3904.74

6.76

53.97

2068/69

32798.05

4339.42

7.56

48.29

Average

24317.31

3890.37

6.19

59.01

r=0.89 Source: Annual Report of NT

P.E.=0.06

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The above table shows the receivable turnover of NDCL during five study year and average collection period. In fiscal year 2064/65, it has ratio of 5.03 times which has risen to 5.74 times in fiscal year 2065/66. Further it has increased to 5.83 times in fiscal year 2066/67. It has increases to 6.76 in fiscal year 2067/68 and 7.56 times in fiscal year 7.56 times which is the highest ratio among the five studied year. Overall it has average receivable turnover ratio of 6.19 times. The average collection period of credit Revenue has found to be best in fiscal year 2068/69 is only 48.29 days. It means credit Revenue amount are collected only within 39 days. In fiscal year 2064/65 it has delay collection period of 72.55 days. Overall it has average collection period of 59.01 days. 4.6.4 Cash and Bank Balance Turnover Ratio: It is one of the main parts of current assets which have greater value to meet the current obligations occurred in the business. It should be just adequate to run business and excess cash has no meanings as it earns nothing. So, the companies always see the risk return trade off to maintain just adequate cash balance. The table presented below shows the cash turnover position of the NDCL during the period of study. Table 4.23 Cash & Bank Bal. Turnover Ratio (Rs. In Millions) Fiscal Year

Revenue

Cash & Bank Balance

Ratio

2064/65

16694.26

16,135

1.03

2065/66

20628.95

18,191

1.13

2066/67

25058.30

21,612

1.16

2067/68

26406.99

16,769

1.57

2068/69

32798.05

25,221

1.30

Average

24317.31

19585.39

1.24

r=0.81

P.E.=0.1

Source: Annual Report of NT

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The above table shows the cash and bank balance turnover ratio of NDCL In fiscal year 2064/65 it is 1.03 times, which has increased to 1.13 and 1.16 times in the fiscal year 2065/66 and 2066/67 respectively. The 1.03 times is the lowest ratio among the studied year. Again, the ratio has risen to 1.57 and decreases to 1.30 times in the fiscal year 2067/68 and 2068/69 respectively. In fiscal year 2067/68 it has highest ratio of 1.57 times. Overall average cash and bank balance turnover ratio of the firm during five study year is 1.24 times. 4.7 Leverage Ratio: Leverage ratio or capital structure ratio are also known as long-term solvency ratio. Leverage ratio is used to measure the financial risk and to know that how far the firm is using its debt for the benefits of shareholders. Leverage ratio also reflects the proportion of debt in total financing. The two types of leverage ratio are shows below: 4.7.1 Short-term Financing (STF) to Long-term Financing (LTF) Ratio: This ratio is computed by dividing short-term financing amount by the long term financing. Fund raised from short-term financing can be used to increase current assets, to meet daily expenses. The table presented below shows this ratio. Table 4.24 ST Financing to LT fin. Ratio (Rs. In Millions) Fiscal Year

STF

LTF

Ratio

2064/65

6478.04

32,197

0.20

2065/66

6718.05

39,563

0.17

2066/67

6929.34

45,575

0.15

2067/68

7858.02

68,164

0.12

2068/69

10757.85

95,160

0.11

Total

38741.31

280659.33

0.75

Average

7748.26

56131.87

0.15

r=0.97 Source: Annual Report of NT

P.E.=0.02

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The above table shows the short-term financing to long-term financing of NDCL during the five study period. In fiscal year 2064/65, it has 0.20 times which is the highest during five years of study period. It has lowest of 0.11 times in fiscal year 2068/69. It has 0.17 and 0.15 times ratio in fiscal year 2065/66 and 2066/67 respectively. In fiscal year 2067/68 it has ratio of 0.12 times. Overall it has average ratio of 0.15 times. 4.7.2 Short-term Financing (STF) to Total Financing (TF) Ratio: This ratio shows the proportion of short-term financing out of total financing amount. This ratio is computed by total financing. If a firm uses more short term financing then, an aggressive policy is said to be followed by the firm. The table below shows the STF to TF ratio of NDCL during five study period. Table 4.25 ST Financing to Tot. Fin. Ratio (Rs. In Millions) Fiscal Year

STF

TF

Ratio

2064/65

6478.04

38,675

0.17

2065/66

6718.05

46,281

0.15

2066/67

6929.34

52,505

0.13

2067/68

7858.02

76,022

0.10

2068/69

10757.85

105,918

0.10

Total

38741.31

319400.63

0.65

Average

7748.26

63880.13

0.13

r=0.97 Source: Annual Report of NT

P.E.=0.02

The above table shows the STF to TF ratio of NDCL during five study period which is 0.17 in fiscal year 2064/65, 0.15 in 2065/66, 0.13 in 2066/67, 0.10 in 2009/10 and 2010/11. The ratio of 0.17 in fiscal year 2064/65 is the highest ratio and the ratio of 0.10 in fiscal year 2067/68 and 2068/69 is the lowest one. Overall average ratio is 0.13 times. 77

4.8 Cash Conversion Cycle Model: A cash conversion cycle reflects the net time interval in days between actual cash expenditures of the firm on Service resources and the ultimate recovery of cash. The cash conversion cycle (net operating cycle) represents the net time gap between investment of cash and its recovery of Revenue. It is the net time interval between cash collection from sale of services and cash payment for resources acquired by the firm. Cash Conversion Cycle (CCC) is calculated by subtracting payable deferral period (PDP) from Operating Cycle; whereas Operating Cycle is the sum of Inventory Conversion Period (ICP) and Receivable Conversion Period (RCP). The table below shows the Cash Conversion Cycle of NDCL during five study period. Table 4.26 Cash Conversion Cycle (In Days) Fiscal Year

ICP

RCP

PDP

CCC

2064/65

9.10

72.55

128.94

-47.28

2065/66

3.19

63.58

155.74

-88.97

2066/67

2.51

62.58

109.95

-44.86

2067/68

13.24

53.97

132.83

-65.62

2068/69

11.68

48.29

88.38

-28.41

Total

39.73

300.97

615.84

-275.14

Average

7.95

60.19

123.17

-55.03

Source: Annual Report of NT The CCC of NDCL is negative which indicates that there is no time to convert service into cash. NDCL has no or little inventory of spare parts. There is low inventory conversion period and high payables deferral period causing negative cash conversion cycle. Cash conversion cycle service organization which has no inventory and no credit Revenue has no indication.

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4.9 Trend Analysis (Time Series Analysis) Trend analysis indicates the tendency of values. It helps to forecast and planning of the future situation of value. Trend analysis predicts the future value based on historical data. Here, the trend analysis of different variables relating to working capital is analyzed to forecast the future trend of concerned variables. 4.9.1 Trend Analysis of Revenue Every business firm’s main objective is to sell of their products and services so the sale is most important activity. The survival and growth of the company depends on the sale of the product. The following table and figure shows the trend analysis of Revenue. Table 4.27 Trend Analysis of Revenue of NDCL Fiscal Year(N)

Nepal Doorsanchar Company Limited Revenue(Y)

Trend Values

2064/65

16694.26

16720.19

2065/66

20628.95

20518.75

2066/67

25058.30

24317.31

2067/68

26406.99

28115.88

2068/69

32798.05

31914.44

2069/70

121586.56

35713

2070/71

39511.57

2071/72

43310.13

2072/73

47108.69

2073/74

50907.26

Source: Appendix II By the above table and figure, the future trend of revenue of NDCL is increasing trend. The trend analysis of revenue indicates that the revenue for the study period is highly increasing. Thus it can survive well.

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Figure 4.1 Trend Analysis of Revenue of NDCL 60000

Rs. in Million

50000 40000 30000 Trend value of Sales

20000

Actual Sales

10000 0

Fiscal Years

Source: Table 4.27 4.9.2 Trend Analysis of Inventory Though inventory is less important part of the current assets for Service organization like NDCL, The shortage of required inventory result irregular service delivery, high inventory cost due to fast track procurement process, Revenue loss etc. caused so the inventory must be in optimum position. The following table and figures shows the trend analysis of inventory.

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Table 4.28 Trend Analysis of Inventory of NDCL Fiscal Year(N)

Nepal Doorsanchar Company Limited Inventory

Trend Values

2064/65

416.42

146.42

2065/66

180.13

350.87

2066/67

172.27

555.31

2067/68

958.05

759.76

2068/69

1049.69

964.20

2069/70

1168.65

2070/71

1373.09

2071/72

1577.54

2072/73

1781.98

2073/74

1986.43

Source: Appendix III By the above table and figure, the inventory for the study period is in slightly fluctuation but the estimated values of inventory for the study periods are in increasing trend. By this analysis the trend analysis of inventory indicates that the inventory for the study period is upwards and the actual inventory line indicates that the value of inventory for the study periods decreasing in initial period then increasing is consistent.

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Figure 4.2 Trend Analysis of Inventory of NDCL

Rs. in Million

2500 2000 1500 1000

Actual Inventory

500

Trend value of Inventory

0

Fiscal Years

Source: Table 4.28 4.9.3 Trend analysis of Current Assets It includes all other current assets expect cash, inventory and receivables. The following table and figure shows the trend of other current assets. Table 4.29 Trend Analysis of Current Assets of NDCL Nepal Doorsanchar Company Limited Fiscal Year(N)

Current Assets

Trend Values

2064/65

25000.47

22887.04

2065/66

28837.30

29503.41

2066/67

35015.36

36119.77

2067/68

38489.55

42736.13

2068/69

53256.15

49352.49

2069/70

55968.85

2070/71

62585.21

2071/72

69201.57

2072/73

75817.93

2073/74

82434.29

Source: Appendix IV

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By the above table and below figure, the actual current assets for the study period is constantly increasing and also the estimated value of other current assets for the study period is in increasing trend so by the time series analysis of other current assets indicates the actual value of other current assets over the study period is increasing and the future trend of current assets is in upwards. Figure 4.3 Trend Analysis of Current Assets of NDCL 90000 80000 Rs. in Million

70000 60000 50000 Actual Current Assets

40000 30000

Trend value of Current Assets

20000 10000 0

Fiscal Years

Source: Table No. 4.29 4.9.4 Trend analysis of Current Liabilities The payment that has to make by the company with in an accounting period that included in current liabilities. It includes sundry creditors, provision for taxation, unclaimed dividend, provision for bonus, housing income tax etc.

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Table 4.30 Trend Analysis of Current Liabilities of NDCL Fiscal Year(N)

Nepal Doorsanchar Company Limited Current Liabilities

Trend Values

2064/65

6478.04

5808.35

2065/66

6718.05

6778.30

2066/67

6929.34

7748.26

2067/68

7858.02

8718.22

2068/69

10757.85

9688.18

2069/70

10658.14

2070/71

11628.09

2071/72

12598.05

2072/73

13568.01

2073/74

14537.97

Source: Appendix V Figure 4.4 Trend Analysis of Current Liabilities of NDCL 16000 14000 Rs. in Million

12000 10000 8000

Actual Current Liabilities

6000 4000

Trend values of Currrent Liabilities

2000 0

Fiscal Years

Source: Table No. 4.29

84

By the above table and figures the actual current liabilities is constant initially and increasing thereafter. In first three years current liabilities of NDCL is constant and increasing for last periods. But the trend analysis of current liabilities of NDCL is increasing trend. 4.10 Simple Regression Analysis Regression analysis studies the statistical relationship between the variables. The main objective of regression analysis is to predict or estimate the value of dependent variable corresponding to a given value of independent variables. While regression analysis has been developed to study and measure the statistical relationship between two variables only then the process is known has the simple regression analysis. 4.10.1 Regression Analysis of Inventory and Net Profit after Tax A regression line also can be fitted to show the degree of relationship between Inventory and Net profit after tax. For this purpose, inventory is taken as independent variable and Net profit after tax as dependent variable. The regression line of net profit after tax (y) on Inventory (x) is given below: Y a

bx Table 4.31 Simple Regression Result of Inventory on Net Profit after Tax

Regression Equation NPAT (Y) on I (X)

Regression Equation Y 251.

2.23

Value of Constant ‘a’ a 9251.99

Regression Coefficient ‘b’ b 2.23

Source: Appendix VI The Y intercept a = 9251.99 tell us that when the amount of inventory is zero, the expected change in the NPAT is 9251.99 i.e. NPAT is predicted to increase by 9251.99 million during the year. The slope b = 2.23 represent that each increase in inventory of 1 millions, we predict that the expected change in the NPAT is +2.23

85

i.e. the NPAT is predicted to increase by 2.23 million for each 1 million increase in inventory. 4.10.2 Regression Analysis of Current Assets and Net Profit after Tax A regression line also can be fitted to show the degree of relationship between Current Assets and Net profit after tax. For this purpose, Current Assets are taken as independent variable and Net profit after tax as dependent variable. The regression line of net profit after tax (y) on Current Assets (x) is given below: Y a

bx Table 4. 32 Simple Regression Result of Net Profit after Tax on Current Assets Regression

Regression Equation

Value of

Regression

Constant ‘a’ Coefficient

Equation

‘b’ NPAT (Y) on CA

Y

6332.16

0.115

a

6332.16

b

0.12

(X) Source: Appendix VII

The Y intercept a = 6332.168 tell us that when the amount of CA is zero, the expected change in the NPAT is 6332.168 i.e. NPAT is predicted to increase by 6332.168 million during the year. The slope b = 0.115 represent that each increase in CA of 1 millions, we predict that the expected change in the NPAT is +0.115 i.e. the NPAT is predicted to increase by 0.115 million for each 1 million increase in CA. 4.10.3 Regression Analysis of Current Assets and Current Liabilities A regression line also can be fitted to show the degree of relationship between Current Assets and Current Liabilities. For this purpose, Current Assets are taken

86

as independent variable and Current Liabilities as dependent variable. The regression line of Current Liabilities (y) on Current Assets (x) is given below: Y a

bx Table 4. 33 Simple Regression Result of Current Liabilities on Current Assets

Regression Equation CL (Y) on CA (X)

Regression Equation Y

211 .126 0.156

Value of

Regression

Constant ‘a’

Coefficient ‘b’

a 211 .126

b

0.156

Source: Appendix VIII The Y intercept a =

tell us that when the amount of CA is zero, the

expected change in the CL is

i.e. CL is predicted to increase by

million during the year. The slope b = 0.156 represent that each increase in CA of 1 millions, we predict that the expected change in the CL is +0.156 i.e. the CL is predicted to increase by 0.156 million for each 1 million increase in CA. 4.11 Multiple Regression Analysis Multiple regression equation is the algebraic relationship between one dependent variable and two or more independent variables. This relationship is used to estimate the value of dependent variable for the given values of independent variables. 4.11.1 Multiple Regression Analysis of NPAT on CA & CL In Multiple regressions one dependent variable Net Profit After Tax ( independent variables are Current Assets (

) and Current Liabilities (

the multiple regression equation for the observed data is given by: 1

a b1

2

b2 87

3

.i

) and two ) so that

Table 4. 34 Multiple Regression Analysis of NPAT on CA & CL Variables

NPAT(

Multiple Regression

Value of

Regression

Regression

Equation

Constant

Coefficient

Coefficient

‘a’

‘b1’

‘b2’

1)

1

ON CA(

2)

and CL(

3)

110.1 0.07

0.30

2

110.1

0.30

0.07

3

Source: Appendix IX The intercept a =

denotes when the amount of CA and CL are zero, the

expected change in NPAT is

i.e. the NPAT is predicted to decrease by

million during the years, the slope b1 =

represents that each increase

in CA of 1 million keeping CL as constant, we predict that the expected changing NPAT is

i.e. the NPAT is predicted to increase by

million increase in CA. The slope b =

million for each 1

represents that each increase in CL of

1 million keeping CA as constant, we predict that the expected changing NPAT is i.e. the NPAT is predicted to decrease by

million for each 1 million

increase in CL. 4.12 Major Findings: The major findings of the study during the period of five years in NDCL from the analysis of secondary sources are summarized below: i)

The major components of current assets of NDCL are cash and bank, sundry debtors, inventory and advance deposits. During the study years inventory holds the minor portions of NDCL’s current assets i.e. 1.45% average. The average percentage of cash and bank, sundry debtors and advance deposits are 56.05%, 11.26% and 31.16%. Because in many company not any terms are constitute as a current assets. 88

ii)

The proportion of current assets to total assets is fluctuating during the study period. It has been fluctuated from 50.28% to 66.69%. The fiscal year 2066/67 has the highest proportion of current assets to total asset of 66.69% during the fine study period. And fiscal year 2068/69 has the lowest proportion of 50.28%. Because it changes with activity levels.

iii)

Higher the proportion of current assets to fixed assets higher the risk and return will be. So, in fiscal year 2066/67, the proportion of current assets to fixed assets is highest with 3.34 times, it means that during this year, risk and return is more than in other study years. And in fiscal year 2067/68, it has proportion of 0.84 times which is lowest with low risk and return than in other study year. Because management follows consistence investment.

iv)

The proportion of cash and bank balance to current assets is decreasing during the study period except in 2068/68. It has 64.54%, 63.08%, 61.72%, 43.57% and 47.36% proportion of cash and bank balance to current assets from fiscal year 2064/65 to 2068/69 respectively.

v)

The average proportion of cash and bank balance to total assets is 33.61% during the study period. Higher the proportion of cash and bank balance to total assets, lower the risk and return and vice-versa. In fiscal year 2065/66, the company has highest ratio among the study period, it means it has low risk and return. And in fiscal year 2067/68, it has lowest ratio 22.06% with high risk and return. Overall, the company has followed the conservative working capital policy.

vi)

The proportion of inventory to total assets is fluctuating during the study period. The company has 1.08%, 0.39%, 0.33%, 1.26% and 0.99% of proportion of inventory to total assets respectively from fiscal year 2064/65 to 2068/69. The firm has highest ratio in fiscal year 2067/68 and lowest in fiscal year 2066/67.

89

vii)

The average proportion of inventory to current assets is 1.45% during the study period. The proportion has been fluctuated from 0.49% to 2.49% during the study year. In fiscal year 2067/68 it has highest proportion and lowest in fiscal year 2066/67. Because only 1.45% parts is taken over by inventory so that result is obtained

viii)

The average proportion of receivable to total assets is 6% during the five study year. Higher degree of receivable result unnecessary hold up of working capital and lower degree of receivable may cause negative result in Revenue level. it depends upon the total assets.

ix)

The proportion of receivable to current assets is decreasing during the study period. In fiscal year 2064/65, it has highest ratio of 13.27% and in fiscal year 2068/69 it has lowest of 8.15%. Picture is different in case of service organization like NDCL, receivables is increasing in lower rate than current assets over the year

x)

The average current ratio of NDCL is 4.61 times during the study period. This ratio is quite high to the standard current ratio of 2 times. It means that the firm has enough current assets to pay current obligations. In fiscal year 2067/68, the firm has best ratio i.e. 5.05 times among the five study years. Because current assets & current liabilities are directly proportional to the standard current ratio i.e. 2 times.

xi)

The average quick ratio is 4.34 times during the study period, which is higher than the standard of 1 time. In fiscal year 2066/67, it has highest ratio among the other studied year which is 5.03 times. And in fiscal year 2067/68, it has lowest ratio of 3.74 times which is also higher than standard ratio. Because the proportional of inventory is comparatively lower in every year than other current assets.

xii)

The cash ratio is not so fluctuating during the study period. The average cash ratio is 2.56% during the study period. The company has highest cash ratio during the fiscal year 2066/67 and lowest during the fiscal 90

year 2067/68. Because it depends upon the current liabilities & value of itself .thus its value is affected in accordance with its fluctuation. xiii)

The average working capital to current assets ratio is 78% during the study period. It has highest ratio in fiscal year 2067/68 and lower in fiscal year 2064/65. Because working capital to current ratio is directly proportional to current assets & inversely proportional to current liabilities.

xiv)

Profitability is the measure of efficiency. The profitability position is analyzed from various angles. The gross profit margin of NDCL is fluctuating over study period. The highest gross profit margin of 66.09% in fiscal year 2065/66 and lowest of 47.62% in fiscal year 2068/69.

xv)

Turnover ratio measures the degree of effectiveness in use of resource or fund by a company. The turnover position is analyzed from various angles. The average working capital turnover is 0.87 times during the study period. The average inventory turnover ratio is 71.78 times during the five study years. The average receivable turnover ratio is 59 days.

xvi)

The average short-term financing to long-term financing ratio is 0.15 times during the study period. The short-term financing to total financing ratio is fluctuated from 0.10 times to 0.17 times.

xvii)

The trend analysis of Revenue of NDCL is increasing trend and actual value of Revenue is also increasing. Same Inventory & current assets actual value is increasing trend and trend value is also increasing trend. Current liabilities show same behavior i.e., trend value is increasing trend over the study period.

xviii) In NDCL the regression equation of NPAT on Inventory or Current

Assets shows if independent variables (Inventory or CA) are zero the dependent variables (NPAT) must be positive and increase in

91

independent variables, the dependent variables must be increase by large amount. xix)

The regression equation of CL on CA shows that if CA is zero the CL must be positive on other hands if each increase in CA, the CL must be increase by 0.156 millions.

xx)

The multiple regression equation of NPAT on CA & CL shows that if CA and CL are zero the NPAT must be negative and if per rupees of CA increase (keeping CL as constant) the NPAT is increases. If per rupees of CL increase (keeping CA as constant) the NPAT is decreases.

92

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 Summary: The first chapter describes the brief introduction of the study, history of telecommunication services and establishment of Nepal Doorsanchar Company Limited. This chapter includes background, statement of problem, objectives of the study, and significances of the study and organization of the study as a whole. The second chapter is review of literature. This chapter deals with the general concept of the writer and thesis towards the working capital management. This includes the opinion of different writers regarding with the thesis topic. It also includes review of pervious related research studies and previous student. The third chapter is research methodology. It has included the research design. It present the nature and sources of data, data collection and processing technique and financial and statistical tools used. This chapter gives the knowledge about various ratios and Karl Pearson’s Correlation Coefficient and Probable Error. The fourth chapter is presentation and analysis of data. An attempt to analyze the working capital policy and trade off between liquidity and profitability of NDCL during five fiscal years (2064/65 to 2068/69) has been done. For the purpose of the analysis of composition of current assets and current liabilities, proportion of current assets to total assets and fixed assets, proportion of cash and bank balance to total assets and current assets, proportion of inventory to total assets and current assets, proportion of receivable to total assets and current assets have been analyzed. It has also analyzed the current ratio, profitability ratio, turnover ratio and leverage ratio in this chapter with the major finding from the result of calculation. And in the last chapter an attempt has been made to present summary, some suggestion for NDCL as recommendation and lastly conclusions about the study.

93

The basic objective of this study is to examine the management of working capital of NDCL. To accomplish these objectives set earlier in first chapter, the necessary data as from secondary source are collected from financial statements of the NDCL. The secondary data has been analyzed through ratio analysis as a financial tools and correlation coefficient as a statistical tool. The major ratio analysis consists of composition of working capital position, liquidity position, turnover position, profitability position and leverage position. In order to test the relationship between the various variable of working capital, Karl Pearson’s Correlation Coefficient (r) is calculated and analyzed. 5.2 Conclusion: In conclusion, it can be said safely that the working capital management cannot be neglected by NDCL Otherwise; it can seriously erode its financial viability in long run. Thus, managers must understand the factors determining working capital needs because surplus of working capital has no earning and do not increase the value of the company. The proportion of current assets with respect to total assets and net fixed assets in NDCL shows that current assets absorb high percentage of those total assets, as the higher ratio indicates the greater amount of working capital which will decrease risk and profitability. It is due to higher proportion of cash and cash equivalent and receivables. There is positive correlation between current assets and total assets as well as statically significant and there is significant difference between two variables which could adversely affect in the firm’s wealth maximization goal is the long run. Inventory management is in low priority of Service Company. It absorbs lower percentage of total current assets which means less funds tie-up of in it. So far as liquidity is concerned, it is a lease liquid current asset in itself. There is the positive correlation in between current asset and inventory. But the management of inventory is unsound.

94

Cash constitute an important part of assets of the firm. The profitability position of the NDCL during the study period is satisfactory. Although it followed conservative working capital which reduces risk but hamper in profitability in long run. So, the firm can improve it by following appropriate working capital policy which could maximize its profitability.

5.3 Recommendation: Based on the finding of the study the following recommendations are forwarded for the improvement of the working capital management of NDCL i) Effective Working Capital Management: Financial situation is sound. But they must follow appropriate working capital policy not only conservative. Beside this, there should be policy to prevent the holding of excessive and inadequate current assets in the firm. In NDCL the most important current assets are cash and cash equivalent, loan, advance and others which are given below: ii) Effective Management of Cash: The function of investment in money assets is to meet operational requirements in day to day business, to provide a reserve of liquidity for major schedule outflows of cash, to exploit opportunities, to avoid unexpected drains of cash and so on. There are many ways to effective management of excess cash in NDCL such as: investment in marketable securities, new technological projects etc. If cash appears more than requirement, the company showed invests such ideal fund in different service area such as hydropower plant, software develop company, spare parts production company for portfolio diversification to minimize risk of uncompetitive in the market.

95

iii) Effective Management of Receivable: In NDCL there is lower investment in receivable. But there should be neither over investment nor lower investment in receivable. These policies involving receivable management involves trade-off between risk and return. The main determinants of the size of investment are terms of sale, the selection of customers to give credit, efficiency in collecting receivables and so on. Collection of excess bill of customer who left the service and take new number or line should be cross checked. iv) Effective Inventory Management: Inventory absorbs very low percentage of current assets. Spare parts of equipment, service equipment although in low portion are important for service organization should be kept properly according to sales plans. For this company should make effective sales plan which helps for immediate marketability. The management must minimize the wastage, scarps, there should be good store-keeping system better material handling system and timely inspection system. Moreover the useful, the non-moving and absolute items should be discarded to avoid unnecessary blockage up of inventory. v) Improvement of Turnover Position: It is found that net working capital turnover is very low which indicates that utilization of net working capital higher level of current assets with sales have contributed for lower turnover. If the company will manage working capital properly, the net working capital will be higher. vi) Minimizing the Operating Cost: During the period of study, the NDCL is having high cost of maintenance and operation expenses. The management should give attention towards the maintenance practice, unnecessary expenses, misuse of facilities, heavy expenses on overheads which are the major causes for high operating cost.

96

vii) Prepare Effective Sales Plan: Sales directly affect the need of current assets. As the sales increase the working capital level will also increase. In the absence of sales forecast the level of current assets cannot be forecasted. But for its market competition and service delivery should also be analyzed. viii) Positive Attitude towards Risk: Since, the risk is the opportunity for company to make profit; that management should not consider it is dangerous. It is the ability to manage the current assets properly and efficiently. NDCL is not in risk now but it cannot be said it is free from risk in long run because of adoption of conservative working capital policy.

97

BIBLIOGRAPHY Books: Acharya, K. (2008). Problems and Impediment in the Management of Working Capital in Nepalese Enterprises, New Delhi: National Book Organization. Gitman, L. J. (2006). Principles of Management Finance, New York: Harper & Raw. Khan, M. Y., Jain, P. K. (2006). Financial Management Text & Problems, New Delhi: Tata McGraw Hill. Kuchhal, S. C. (2005). Corporate Finance, New Delhi: Chaitanya Publishing House. Muny, D. B. (1996). Industrial Development Guide, Accelerating Economic Growth, New York: Mc Grew hill Book Company. Pandey, I. M. (2009). Financial Management, New Delhi: Vikash Publishing House Pvt. Ltd. Pradhan, R. S. (2006). Management of Working Capital, New Delhi: National Book Organization. Srivastav, R. M. (2006). Financial Decision Making, text, Problem & Cases, New Delhi: Sterling Publishers Pvt. Ltd. Weston, J. F., Brigham, E. (2008). Managerial Finance, New York: The Dryden Press Hinsdale. Journals: Acharya, K., (1985). The Management of Working Capital in the Public Enterprises of Nepal, Nepalese Development Studies. Altman, E. I. (2000). Zeta Analysis: A New Model to Identity Bankruptcy Risk Corporations, Journal of Banking and Finance. Pradhan, R. S. (1986). The Demand for Working Capital by Nepalese Corporation, The Nepalese Management Review, Vol. 8.

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Shrestha, M. K. (1983). Working Capital Management: A Case Study on Financial Results and Constraints, Economical Bulletin, Vol. 8, Kathmandu. Ven Horne, J. C. (2005). A Risk Return analysis of a Firm's Working Capital position, Engineering Economist. Walker, E.W. (2006). Towards a Theory of Working Capital, Engineering Economist. Dissertation: Gyawali, K. (2013). Working Capital Management of Sumi Distillery Private Limited, An Unpublished Dissertation, MBS, T.U. Joshi, R. (2013). Working Capital Management of Commercial Banks in Nepal, An Unpublished Dissertation, MBS, T.U. Mahato, U. K. (2006). Working Capital Management of Nepal Lever Limited (NLL), An Unpublished Dissertation, MBS, T.U.

99

Appendix-1 Examine the relationship between Current Assets and Total Assets (Rs. In Millions) Current

Total

Assets(X)

Assets(Y)

2064/65

25000.47

38675.47

-11119.29

123638655.79

-25204.65

635274522.54

280257895.56

2065/66

28837.30

46280.63

-7282.47

53034379.00

-17599.50

309742417.34

128167846.02

2066/67

35015.36

52504.65

-1104.40

1219703.30

-11375.48

129401539.55

12563100.12

2067/68

38489.55

76021.56

2369.78

5615853.33

12141.43

147414375.88

28772513.16

2068/69

53256.15

105918.33

17136.39

293655702.21

42038.20

1767210329.07

720382808.05

Year(N)

̅

∑

=

0.00

̅

∑

∑ 477164293.62

101

0.00

∑ 2989043184.38

∑ 1170144162.91

∑

∑ (∑

√[∑

)

√

=

√

√

102

] [∑

∑ (∑

)

]

Examine the relationship between Current Assets and Fixed Assets (Rs. In Millions)

Current

Fixed

Assets(X)

Assets(Y)

2064/65

25000.47

25193.71

-11119.296

123638743.5

-11705.9174

137028502

130161560.5

2065/66

28837.3

29849.39

-7282.466

53034311.04

-7050.23653

49705835.15

51343107.83

2066/67

35015.36

31150.35

-1104.406

1219712.613

-5749.28426

33054269.51

6349544.033

2067/68

38489.55

45642.52

2369.784

5615876.207

8742.89247

76438168.8

20718766.7

2068/69

53256.15

52662.18

17136.384

293655656.6

15762.5457

248457847.4

270113036.2

Year(N)

̅

∑

0

̅

∑ 477164300

103

∑

0

∑ 544684622.9

∑ 478686015.2

∑

∑ (∑

√[∑

)

√

=

√

√

104

] [∑

∑ (∑

)

]

Examine the relationship between Current Assets and Cash and Bank Balance (Rs. In Millions) Current

̅

̅

Year(N)

CBB(X)

2064/65

16,135

25000.47

-3450.87

11908511.53

-11119.29

123638655.79

38371243.90

2065/66

18,191

28837.30

-1394.33

1944155.57

-7282.47

53034379.00

10154165.82

2066/67

21,612

35015.36

2026.15

4105278.02

-1104.40

1219703.30

-2237682.09

2067/68

16,769

38489.55

-2816.18

7930886.64

2369.78

5615853.33

-6673731.80

2068/69

25,221

53256.15

5635.24

31755877.40

17136.39

293655702.21

96567564.31

Assets(Y)

∑ 0.00

∑

∑ 57644709.16

105

0.00

∑ 477164293.62

∑ 136181560.14

∑

∑ (∑

√[∑

)

√

=

√

√

106

] [∑

∑ (∑

)

]

Examine the relationship between Inventory and Total Assets (Rs. In Millions) Current

̅

̅

Year(N)

CBB(X)

2064/65

416.42

38675.47

-138.89

19290.35

-25204.65

635274522.54

3500666.60

2065/66

180.13

46280.63

-375.18

140761.72

-17599.50

309742417.34

6603020.09

2066/67

172.27

52504.65

-383.04

146721.12

-11375.48

129401539.55

4357285.67

2067/68

958.05

76021.56

402.74

162198.48

12141.43

147414375.88

4889824.85

2068/69

1049.69

105918.33

494.38

244406.79

42038.20

1767210329.07

20782641.78

Assets(Y)

∑ 0.00

∑

∑ 713378.44

107

0.00

∑ 2989043184.38

∑ 40133438.99

∑

∑ (∑

√[∑

)

√

=

√

√

108

] [∑

∑ (∑

)

]

Examine the relationship between Inventory and Current Assets (Rs. In Millions) Inventory

Current

(X)

Assets(Y)

2064/65

416.42

25000.47

-138.89

19290.35

-11119.29

123638655.79

1544355.11

2065/66

180.13

28837.30

-375.18

140761.72

-7282.47

53034379.00

2732253.69

2066/67

172.27

35015.36

-383.04

146721.12

-1104.40

1219703.30

423032.19

2067/68

958.05

38489.55

402.74

162198.48

2369.78

5615853.33

954401.83

2068/69

1049.69

53256.15

494.38

244406.79

17136.39

293655702.21

8471803.04

Year(N)

̅

∑ 0.00

̅

∑ 713378.44

109

∑ 0.00

∑ 477164293.62

∑ 14125845.86

∑

∑ (∑

√[∑

)

√

=

√

√

110

] [∑

∑ (∑

)

]

Examine the relationship between Inventory and Current Assets (Rs. In Millions)

Year(N)

Current Assets (X)

Current ̅

Liabilities

̅

(Y)

2064/65

25000.47

6478.04

-11119.29

123638655.79

-1270.22

1613450.08

14123908.75

2065/66

28837.30

6718.05

-7282.47

53034379.00

-1030.21

1061326.14

7502451.10

2066/67

35015.36

6929.34

-1104.40

1219703.30

-818.93

670639.95

904423.44

2067/68

38489.55

7858.02

2369.78

5615853.33

109.76

12046.79

260101.89

2068/69

53256.15

10757.85

17136.39

293655702.21

3009.59

9057641.73

51573521.73

∑ 0.00

∑ 477164293.62

111

∑ 0.00

∑ 12415104.68

∑ 74364406.91

∑

∑ (∑

√[∑

)

√

=

√

√

112

] [∑

∑ (∑

)

]

Appendix-1 Trend Analysis of Sales of NDCL ̅

Fiscal Year

Sales( )

2064/65

1

-2

16694.26

4

-33388.52

2065/66

2

-1

20628.95

1

-20628.95

2066/67

3

0

25058.30

0

0.00

2067/68

4

1

26406.99

1

26406.99

2068/69

5

2

32798.05

4

65596.11

N=5

∑

∑

121586.56

∑

10

∑

37985.63

Let Trend line be

Where

∑

∑ ∑ Su s u

g

v u s f‘ ’

‘ ’

113

qu

f

s

For trend values, Fiscal Year(N)

Trend Values

2064/65

-2

16720.19

2065/66

-1

20518.75

2066/67

0

24317.31

2067/68

1

28115.88

2068/69

2

31914.44

2069/70

3

35713

2070/71

4

39511.57

2071/72

5

43310.13

2072/73

6

47108.69

2073/74

7

50907.26

Appendix-III Trend Analysis of Inventory of NDCL Fiscal

̅

Inventory( )

Year 2064/65

1

-2

416.42

4

-832.85

2065/66

2

-1

180.13

1

-180.13

2066/67

3

0

172.27

0

0.00

2067/68

4

1

958.05

1

958.05

2068/69

5

2

1049.69

4

2099.38

∑ N=5

∑

∑

2776.57

114

∑ 10

2044.45

Let Trend line be

Where

∑

∑ ∑ Su s u

g

v u s f‘ ’

‘ ’

qu

of the trend line is

For trend values, Fiscal Year(N)

Trend Values

2064/65

-2

146.42

2065/66

-1

350.87

2066/67

0

555.31

2067/68

1

759.76

2068/69

2

964.20

2069/70

3

1168.65

2070/71

4

1373.09

2071/72

5

1577.54

2072/73

6

1781.98

2073/74

7

1986.43

115

Appendix-IV Trend Analysis of Current Assets of NDCL Fiscal

Current

̅

Assets( )

Year 2064/65

1

-2

25000.47

4 -50000.95

2065/66

2

-1

28837.30

1 -28837.30

2066/67

3

0

35015.36

0

0.00

2067/68

4

1

38489.55

1

38489.55

2068/69

5

2

53256.15

4 106512.30 ∑

∑

∑

N=5

180598.83 ∑

10

66163.60

Let Trend line be

Where

∑ ∑ ∑

Su s u

g

v u s f‘ ’

‘ ’

116

qu

f

s

For trend values, Fiscal Year(N)

Trend Values

2064/65

-2

22887.04

2065/66

-1

29503.41

2066/67

0

36119.77

2067/68

1

42736.13

2068/69

2

49352.49

2069/70

3

55968.85

2070/71

4

62585.21

2071/72

5

69201.57

2072/73

6

75817.93

2073/74

7

82434.29

Appendix-V Trend Analysis of Current Liabilities of NDCL Fiscal

Current

̅

Liabilities( )

Year 2064/65

1

-2

6478.04

4

-12956.09

2065/66

2

-1

6718.05

1

-6718.05

2066/67

3

0

6929.34

0

0.00

2067/68

4

1

7858.02

1

7858.02

2068/69

5

2

10757.85

4

21515.71

N=5

∑

∑

38741.31

Let Trend line be

117

∑

10

∑

9699.58

Where

∑ ∑ ∑

Su s u

g

v u s f‘ ’

‘ ’

qu

f

s

For trend values, Fiscal Year(N)

Trend Values

2064/65

-2

5808.35

2065/66

-1

6778.30

2066/67

0

7748.26

2067/68

1

8718.22

2068/69

2

9688.18

2069/70

3

10658.14

2070/71

4

11628.09

2071/72

5

12598.05

2072/73

6

13568.01

2073/74

7

14537.97

118

Appendix – VI Regression of NDCL Let Inventory (X) and NPAT (Y) Computation of Regression Equations

416.42

7778.75

3239261.37

173409.1

60509026.92

180.13

10178.02

1833383.91

32447.39

103592187.2

172.27

10775.15

1856256.57

29677.62

116103953.7

958.05

12120.30

11611883.36

917864.7

146901642.9

1049.69

11605.27

12181923.78

1101847

134682282.1

∑

∑

∑

2776.57

52457.50

30722708.99

∑

∑

2255246

561789092.7

Let the regression equation NPAT (Y) on Inventory (X) be ----------------------- (i) To find the values of a and b we have the following two normal equations ---------------- (ii) -------- (iii) Substituting

the values of ,

,

,

,

in equation (ii) & (iii)

we have, --------------- (iv) --------------- (v) Solving (ii) & (iii)

9251.99,

2.23

Substituting the values of a & b in equation (i), the regression equation NPAT (Y) on Inventory (X) is

119

Appendix – VII Regression of NDCL Let CA (X) and NPAT (Y) Computation of Regression Equations

25000.47

7778.75

28837.30

625023691

60509026.92

10178.02

293506703.38 831589594.6

103592187.2

35015.36

10775.15

377295956.64

1226075722

116103953.7

38489.55

12120.30

466504786.35

1481445078

146901642.9

53256.15

11605.27

618051991.58

2836217641

134682282.1

∑

194472556.79

∑

180598.83

∑

52457.50

∑

1949831994.74

∑

7000351726

561789092.7

Let the regression equation NPAT (Y) on Current Assets (X) be ----------------------- (i) To find the values of a and b we have the following two normal equations. ---------------- (ii) -------- (iii) Substituting we have,

the values of ,

,

,

,

in equation (ii) & (iii)

--------------- (ii) --------------- (iii) Solving (ii) & (iii)

6332.168,

0.115

Substituting the values of a & b in equation (i), the regression equation NPAT (Y) on Current Assets (X) is 120

Appendix – VIII Regression of NDCL Let CA (X) and CL (Y) Computation of Regression Equations

25000.47

6478.04

161954193.44

625023691

41965066.53

28837.30

6718.05

193730525.62

831589594.6

45132258.51

35015.36

6929.34

242633202.47

1226075722

48015689.31

38489.55

7858.02

302451590.37

1481445078

61748468.37

53256.15

10757.85

572921852.93

2836217641

115731404

∑

∑

180598.83

∑

38741.31

∑

1473691364.83

7000351726

∑ 312592886.7

Let the regression equation Current Liabilities (Y) on Current Assets (X) be ----------------------- (i)

To find the values of a and b we have the following two normal equations.

---------------- (ii) -------- (iii) Substituting the values of ,

,

,

,

in equation (ii) & (iii) we

have, --------------- (ii) --------------- (iii) Solving (ii) & (iii)

2119.126,

0.156

Substituting the values of a & b in equation (i), the regression equation Current Liabilities (Y) on Current Assets (X) is 121

Appendix – IX Multiple Regression of NDCL Let NPAT (X1) on CA (X2) and CL (X3) Computation of Regression Equations 7778.75 25000.47 10178.02 28837.30 10775.15 35015.36 12120.30 38489.55 11605.27 53256.15 ∑ ∑ 52457.50 180598.8

6478.04 6718.05 6929.34 7858.02 10757.85 ∑ 8741.31

194472556.8 293506703.4 377295956.6 466504786.4 618051991.6 ∑ 1949831995

161954193.4 193730525.6 242633202.5 302451590.4 572921852.9 ∑ 1473691365

50391123.63 68376526.46 74664659.44 95241542.66 124847785.7 ∑ 413521637.9

60509026.92 103592187.2 116103953.7 146901642.9 134682282.1 ∑ 561789092.7

625023691 831589594.6 1226075722 1481445078 2836217641 ∑ 7000351726

41965066.53 45132258.51 48015689.31 61748468.37 115731404 ∑ 312592886.7

Let the multiple regression equation Net Profit after Tax(X1) on Current Assets(X2) and Current Liabilities(X3) The value of constant a, b1 and b2 can be determined by solving following three normal equation simultaneously. ∑ ∑ ∑ Substituting the values of normal equation we get:

Now substituting the value of a,

and

, , then we get multiple regression equation of -

122

on

and

is

Appendix-X Nepal Doorsanchar Company Limited Financial Statements S.N Particulars Base 2064/65 2065/66 2066/67 2067/68 2068/69 Related to Profit and Loss A/C Million(npr) 1 Total Income 17889.31 22257.71 27221.07 31932.18 36791.82 2 Personnel cost 2,204 3,580 3,447 4,507 4,297 3 Maintenance & Operation Cost 1,219 1,688 2,071 4,274 5,720 4 Depreciation 1,486 1,681 4,455 3,286 3,336 5 Other Cost 2,108 1,674 2,806 3,475 7,822 6 Total Cost 7,018 8,624 12,780 15,543 21,175 7 Profit Before Tax 10,871 13,634 14,441 16,390 15,617 8 Profit After Tax 7,943 10,178 10,775 12,120 11,605 Key Financial Indicators % 1 Net Profit Ratio 44.4 45.72 39.58 37.95 31.54 2 EBITDA Margin 69.53 69 69.62 61.8 62.46 3 Return on Capital Employed 25.12 24.94 21.82 16.77 15.46 4 Return on Shareholders' Equity 25.57 26.44 24.27 26.76 23.46 5 Book Value Per Share Rs. 235.63 277.53 314.33 301.97 329.83 6 No. of Shares Thousand 150000 150000 150000 150000 150000 7 EPS Rs. 52.95 67.85 71.83 80.8 77.37

123

Particulars Non-Current Assets Intangible Assets Property, Plant and Equipment Capital Work-in-Progress Investments Deferred Tax Assets Current Assets Inventory Trade Receivable Cash & Cash Equivalents Loan, Advance & Others Investments Total Assets Equity and Liabilities Share Capital Reserve and Surplus Non-Current Liabilities Current Liabilities Provisions Total Equity and Liabilities

Appendix-XI Nepal Doorsanchar Company Limited Balance Sheet Fiscal years 2064/65 2065/66 2066/67

(Rs. In Millions)

12,898 3,923 8,373 987

15,366 3,317 11,167 1,174

14,144 3,972 13,034 1,976

2067/68 11,442 13,311 4,577 24,892 3,256

416 3,318 16,135 4,144

180 3,593 18,191 5,699

172 4,296 21,612 6,960

958 3,905 16,769 16,858

50,194

58,687

66,166

95,346

1,050 4,339 25,221 22,422 225 105,918

15,000 20,180 3,496 6,478 5,041 50,194

15,000 26,629 4,652 6,718 5,688 58,687

15,000 32,150 5,355 6,929 6,732 66,166

15,000 30,296 26,997 7,858 15,194 95,346

15,000 34,475 25,599 10,758 20,087 105,918

124

2068/69 7,415 14,013 5,822 22,155 2,634