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

i

RECOMMENDATION

This is to certify that the thesis

Submitted by


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:

ii

VIVA-VOCE SHEET

We have conducted the Viva-Voce examination of the

Thesis presented by


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:

iii

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:


Researcher

T.U. Reg. No: 7-2-240-49-2004


iv

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.



v

TABLE OF CONTENTS

Recommendation i

Viva-Voce Sheet ii

Declaration iii

Acknowledgment iv

Table of Contents v-vii

List of Tables viii

List of Figures ix

List of Abbreviations x-xi

CHAPTER ONE Page No.

INTRODUCTION 1-7

1.1 Background of the Study 1

1.2 Focus of the study 3

1.3 Statement of Problem 3

1.4 Research Question 4

1.5 Objective of the study 4

1.6 Significance of the study 5

1.7 Limitation of the study 5

1.8 organization of the study 6

CHAPTER TWO

REVIEW OF LITERATURE 8-33

2.1 Introduction 8

2.2 Conceptual of Framework 8

2.3 Concepts of Working Capital 10

2.3.1 Determinants of working capital 12

2.3.2 Source of Working capital 14

2.3.3 Applications of Working Capital 15

2.3.4 Working Capital policy 16

2.3.5 The Cost Trade-off 19

2.4 Classification of Working Capital 20

2.5 Need for working capital 22

2.6 Operating Cycle 24

2.7 Review of Research Studies 25

2.7.1 Review of International Studies 26

2.7.2 Review of Nepalese Studies: 26

vi

2.7.2.1 Review of Journal and Article 26

2.8 Review of Dissertations 30

2.9 Research Gap 33

CHAPTER THREE

RESEARCH METHODOLOGY 34-50

3.1 Introduction 34

3.2 Research Design: 34

3.3 Population and Sample 35

3.3.1 Brief Introduction of Nepal Doorsanchar Co. Ltd. 35

3.4 Nature and Sources of Data: 36

3.5 Data Processing Procedures: 36

3.6 Presentation and Analysis of Data: 36

3.7 Tools of Data Analysis: 36

3.7.1 Financial Tools: 36

3.7.2 Statistical Tools: 48

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA 51-92

4.1 Introduction 51

4.2 Position of Current Assets: 51

4.3 Composition of Working Capital (Financial Ratio) Analysis: 54

4.3.1 Proportion of Current Assets to Total Assets: 54

4.3.2 Proportion of Current Assets to Fixed Assets: 55

4.3.3 Proportion of Cash and Bank Balance to Current Assets: 56

4.3.4 Proportion of Cash & Bank Balance to Total Assets: 57

4.3.5 Proportion of Inventories to Total Assets: 58

4.3.6 Proportion of Inventory to Current Assets: 59

4.3.7 Proportion of Receivables to Total Assets: 60

4.3.8 Proportion of Receivables to Current Assets: 61

4.4 Liquidity Position: 61

4.4.1 Current Ratio: 62

4.4.2 Quick Ratio (Acid Test Ratio): 63

4.4.3 Cash Ratio: 64

4.4.4 Working Capital to Current Assets Ratio: 65

4.5 Profitability Position: 66

4.5.1 Gross Profit Margin (GPM): 66

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4.5.2 Net Profit Margin (NPM): 67

4.5.3 Operating Ratio (OR): 68

4.5.4 Return on Assets (ROA): 69

4.5.5 Return on Net Worth (RONW): 70

4.5.6 Return on Working Capital (ROWC): 71

4.6 Turnover Ratio: 72

4.6.1 Working Capital Turnover (WCT): 73

4.6.2 Inventory Turnover Ratio (ITR): 74

4.6.3 Receivables Turnover Ratio (RTR): 75

4.6.4 Cash and Bank Balance Turnover Ratio: 76

4.7 Leverage Ratio: 77

4.7.1 Short-term Financing (STF) to Long-term Financing (LTF) Ratio: 78

4.7.2 Short-term Financing (STF) to Total Financing (TF) Ratio: 78

4.8 Cash Conversion Cycle Model: 79

4.9 Trend Analysis (Time Series Analysis) 80

4.9.1 Trend Analysis of Sales 81

4.9.2 Trend Analysis of Inventory 82

4.9.3 Trend analysis of Current Assets 84

4.9.4 Trend analysis of Current Liabilities 85

4.10 Simple Regression Analysis 85

4.10.1 Regression Analysis of Inventory and Net Profit after Tax 85

4.10.2 Regression Analysis of Current Assets and Net Profit after Tax 86

4.10.3 Regression Analysis of Current Assets and Current Liabilities 86

4.11 Multiple Regression Analysis 87

4.11.1 Multiple Regression Analysis of NPAT on CA & CL 87

4.12 Major Findings 88

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION 93-97

5.1 Summary 93

5.2 Conclusion 94

5.3 Recommendation 95

Bibliography 98-99

Appendices 100-124

viii

LIST OF TABLES

Table No. Titles Page No.

4.1 Position of Current Assets 53

4.2 Current Assets and Total Assets 54

4.3 Current Assets to Fixed Assets 56

4.4 Cash and Bank Balance to Current Assets 57

4.5 Cash & Bank Balance to Total Assets 58

4.6 Inventory to Total Assets 59

4.7 Inventory to Current Assets 60

4.8 Receivables to Total Assets 60

4.9 Receivables to Current Assets 61

4.10 Current Ratio 62

4.11 Quick Ratio 63

4.12 Cash Ratio 64

4.13 Working Capital to Current Assets Ratio 65

4.14 Gross Profit Margin 66

4.15 Net Profit Margin 67

4.16 Operating Ratio 68

4.17 Return on Assets 69

4.18 Return on Net Worth 70

4.19 Return on Working Capital 71

4.20 Working Capital Turnover 72

4.21 Inventory Turnover 73

4.22 Receivable Turnover 74

4.23 Cash and Bank Balance Turnover 75

4.24 Short-term Financing (STF) to Long-term Financing (LTF) 76

4.25 Short-term Financing (STF) to Total Financing (TF) 77

4.26 Cash Conversion Cycle 78

4.27 Trend Analysis of Sales of SDL 79

4.28 Trend Analysis of Inventory of SDL 81

4.29 Trend Analysis of Current Assets of SDL 82

4.30 Trend Analysis of Current Liabilities of SDL 84

4.31 Simple Regression Result of Inventory on NPAT 85

4.32 Simple Regression Result of Current Assets on NPAT 86

4.33 Simple Regression Result of Current Assets on CL 87

4.34 Multiple Regression Analysis of NPAT on CA & CL 88

ix

LIST OF FIGURES

Figure No. Titles Page No.

2.1 Sources and Application of Fund 16

2.2 Aggressive Approach 17

2.3 Conservative Approach 18

2.4 Moderate Approach 19

2.5 The Cost Trade-off 20

2.6 Types of Working Capital 22

4.1 Trend Analysis of Sales of NDCL 80

4.2 Trend Analysis of Inventory of NDCL 82

4.3 Trend Analysis of Current Assets of NDCL 83

4.4 Trend Analysis of Current Liabilities of NDCL 84

x

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

xi

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

1

CHAPTER ONE

Introduction

1.1 Background of the Study

The term working capital implies a companys 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

companys 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,

2

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.

3

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

4

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.

5

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.

6

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,

7

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.

8

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 firms

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

9

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

10

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)

11

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.

12

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

13

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.

14

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.

15

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.

16

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

17

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.

18

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.

19

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)

20

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 firms

assets are. Depending upon the changes in production and sales, the

need for working capital, over and above permanent working capital

will fluctuate.

21

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).

22

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.

23

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 employees increases on one

hand and on the other, their efficiency also increases.

24

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

25

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.

26

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.

27

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

28

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

29

iv) To estimate the transactions demand function of working capital and its

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

30

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.

31

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

32

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

33

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.

34

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

35

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.

36

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

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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

companys 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= urrent ssets

i ed ssets

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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:

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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 firms a ility to meet the short-term

obligation and reflect the short-term solvency of the company. There are as

follows:

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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 firms 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

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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

42

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 companys 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

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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

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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

Documents

Working Capital Management of Nepal Telecom