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 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
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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

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 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

viii
 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

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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 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,

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.

2
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.

7
 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

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)

10
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.

11
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

12
 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.

14
 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.

15
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 firms
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 employees 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.

25
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 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

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
companys total assets are invested in the form of current assets. It is calculated as:

urrent ssets
CATA=
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:

urrent ssets
CAFA=
i ed ssets

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:

ash an alance
CBBCA
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.

ash an alance
CBBTA
otal ssets

v) Inventories to Total Assets (ITA):

This ratio can be calculated as:

Inventory
ITA=
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
 Inventory
ICA=
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:

eceiva les
RTA=
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:

eceiva les
RCA=
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:

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,

urrent ssets
Current Ratio (CR) =
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.

urrent ssets-Inventory
Quick Ratio (QR) =
urrent ia ilities

40
 uic ssets or iquid ssets
QR =
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.

ash and ar eta le ecurities

Cash Ratio =
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.

ross rofit
GPM =
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.

et rofit after a
NPM =
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.

ost of ood old petatin penses

OR =
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.

et rofit after a
ROA =
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.

et rofit after a
RONW =
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.

et rofit after a
ROWC =
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.

ales
WCT =
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.

ales ost of oods old

ITR = or, ITR =
Inventory 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.

redit ales
RTR =
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).

ays in a ear
ACP =
eceiva le urnover

eceiva les eceiva les

Or, ACP = =
vera e ales per ay ales

iv) 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.

ales
ash and an alance urnover atio
ash and an alance

45
 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 firms 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
Inventory onversion eriod
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
eceiva le ollection eriod
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
aya les eferral eriod
ost of oods old

46
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 firms 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 earsons coefficient of correlation is used:

d dy
d dy
r
( d ) ( dy)
[ d ] [ 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 earsons 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 > 6P.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.

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

y
a
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 owners 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 Advance Deposits Investments Total C.A.
Fiscal Year Amount % Amount % Amount % Amount % 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
Average 56.05 11.26 1.45 31.16 0.08 36119.77
Source: Annual Report of NT

53
The above table represents current assets 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. NTs 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 organizations
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 P.E.=0.10
Source: Annual Report of NT

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 P.E.=0.07
Source: Annual Report of NT

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 Ratio
2064/65 416.42 25000.47 1.67%
2065/66 180.13 28837.30 0.62%
2066/67 172.27 35015.36 0.49%
2067/68 958.05 38489.55 2.49%
2068/69 1049.69 53256.15 1.97%
Average 555.31 36119.77 1.45%
r=0.77 P.E.=0.12
Source: Annual Report of NT

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 Ratio
2064/65 3318.46 38675.47 8.58%
2065/66 3593.21 46280.63 7.76%
2066/67 4296.00 52504.65 8.18%
2067/68 3904.74 76021.56 5.14%
2068/69 4339.42 105918.33 4.10%
Average 3890.37 63880.13 6.75%
Source: Annual Report of NT

60
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 companys 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 companys ability to convert its current assets,
quickly into cash in order to meet its current liabilities. The inventory, which cant
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

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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) Current liab. Ratio
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 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.

64
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.

65
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 P.E.=0.08
Source: Annual Report of NT

66
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 P.E.=0.09
Source: Annual Report of NT

67
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)
Cost of goods sold +
Fiscal Year Revenue Ratio
Operating expenses
2064/65 5986.95 16694.26 35.86%
2065/66 6994.96 20628.95 33.91%
2066/67 10617.21 25058.30 42.37%
2067/68 10017.35 26406.99 37.93%
2068/69 17180.87 32798.05 52.38%
Total 50797.34 121586.56 202.46%
Average 10159.47 24317.31 40.49%
r=0.96 P.E= 0.02
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

68
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

69
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 owners 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 owners 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.

70
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

71
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

72
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 P.E.=0.15
Source: Annual Report of NT

73
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 P.E.=0.06
Source: Annual Report of NT

74
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

75
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 P.E.=0.02
Source: Annual Report of NT

76
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 P.E.=0.02
Source: Annual Report of NT

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.

78
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 firms 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
Nepal Doorsanchar Company Limited
Fiscal Year(N)
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.

79
 Figure 4.1
Trend Analysis of Revenue of NDCL
60000

50000
Rs. in Million

40000

30000

20000 Trend value of Sales

Actual Sales
10000

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.

80
 Table 4.28
Trend Analysis of Inventory of NDCL
Nepal Doorsanchar Company Limited
Fiscal Year(N)
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.

81
 Figure 4.2
Trend Analysis of Inventory of NDCL
2500
2000
Rs. in Million

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

82
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
70000
60000
Rs. in Million

50000
40000 Actual Current Assets
30000
20000 Trend value of Current
10000 Assets
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.

83
 Table 4.30
Trend Analysis of Current Liabilities of NDCL
Nepal Doorsanchar Company Limited
Fiscal Year(N)
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
12000
Rs. in Million

10000
8000
Actual Current Liabilities
6000
4000 Trend values of Currrent
2000 Liabilities
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 Regression Value of Regression
Equation Constant a Coefficient b
NPAT (Y) on I (X) Y 251. 2.23 a 9251.99 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
Equation Constant a Coefficient
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 Value of Regression
Regression Equation
Equation Constant a Coefficient b
CL (Y) on CA (X) Y 211 .126 0.156 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 ( ) and two
independent variables are Current Assets ( ) and Current Liabilities ( ) so that
the multiple regression equation for the observed data is given by:

1 a b1 2 b2 3 .i

87
 Table 4. 34
Multiple Regression Analysis of NPAT on CA & CL

Variables Multiple Regression Value of Regression Regression

Equation Constant Coefficient Coefficient
a b1 b2
NPAT( 1) 1 110.1 0.30 2 110.1 0.30 0.07
ON CA( 2) 0.07 3

and CL( 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 for each 1
million increase in CA. The slope b = 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 NDCLs 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 Pearsons 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 Pearsons
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
firms 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.

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 Appendix-1
Examine the relationship between Current Assets and Total Assets
(Rs. In Millions)
Current Total
Year(N)
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
=
0.00 477164293.62 0.00 2989043184.38 1170144162.91

101


( ) ( )
[ ] [ ]

102
 Examine the relationship between Current Assets and Fixed Assets

(Rs. In Millions)
Current Fixed
Year(N)
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

0 0
477164300 544684622.9 478686015.2

103


( ) ( )
[ ] [ ]

104
 Examine the relationship between Current Assets and Cash and Bank Balance
(Rs. In Millions)
Current
Year(N) CBB(X)
Assets(Y)
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

0.00 57644709.16 0.00 477164293.62 136181560.14

105


( ) ( )
[ ] [ ]

106
 Examine the relationship between Inventory and Total Assets
(Rs. In Millions)
Current
Year(N) CBB(X)
Assets(Y)
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

0.00 713378.44 0.00 2989043184.38 40133438.99

107


( ) ( )
[ ] [ ]

108
 Examine the relationship between Inventory and Current Assets
(Rs. In Millions)
Inventory Current
Year(N)
(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

0.00 713378.44 0.00 477164293.62 14125845.86

109


( ) ( )
[ ] [ ]

110
 Examine the relationship between Inventory and Current Assets
(Rs. In Millions)
Current
Current Assets
Year(N) Liabilities
(X)
(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 0.00 12415104.68 74364406.91

111


( ) ( )
[ ] [ ]

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 10 37985.63
121586.56

Let Trend line be

Where -

Su s u g v u s f qu f s

113
 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 10 2044.45

114
 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

Year Assets( )
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 qu f s

116
 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

Year Liabilities( )
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 10 9699.58

Let Trend line be

117
 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 194472556.79 625023691 60509026.92

28837.30 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

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 the values of , , , , in equation (ii) & (iii)

we have,

--------------- (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 6478.04 194472556.8 161954193.4 50391123.63 60509026.92 625023691 41965066.53

10178.02 28837.30 6718.05 293506703.4 193730525.6 68376526.46 103592187.2 831589594.6 45132258.51
10775.15 35015.36 6929.34 377295956.6 242633202.5 74664659.44 116103953.7 1226075722 48015689.31
12120.30 38489.55 7858.02 466504786.4 302451590.4 95241542.66 146901642.9 1481445078 61748468.37
11605.27 53256.15 10757.85 618051991.6 572921852.9 124847785.7 134682282.1 2836217641 115731404

52457.50 180598.8 8741.31 1949831995 1473691365 413521637.9 561789092.7 7000351726 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 on and is
- -

122
 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
 Appendix-XI
Nepal Doorsanchar Company Limited
Balance Sheet (Rs. In Millions)
Particulars Fiscal years
Non-Current Assets 2064/65 2065/66 2066/67 2067/68 2068/69
Intangible Assets 11,442 7,415
Property, Plant and Equipment 12,898 15,366 14,144 13,311 14,013
Capital Work-in-Progress 3,923 3,317 3,972 4,577 5,822
Investments 8,373 11,167 13,034 24,892 22,155
Deferred Tax Assets 987 1,174 1,976 3,256 2,634
Current Assets
Inventory 416 180 172 958 1,050
Trade Receivable 3,318 3,593 4,296 3,905 4,339
Cash & Cash Equivalents 16,135 18,191 21,612 16,769 25,221
Loan, Advance & Others 4,144 5,699 6,960 16,858 22,422
Investments 225
Total Assets 50,194 58,687 66,166 95,346 105,918
Equity and Liabilities
Share Capital 15,000 15,000 15,000 15,000 15,000
Reserve and Surplus 20,180 26,629 32,150 30,296 34,475
Non-Current Liabilities 3,496 4,652 5,355 26,997 25,599
Current Liabilities 6,478 6,718 6,929 7,858 10,758
Provisions 5,041 5,688 6,732 15,194 20,087
Total Equity and Liabilities 50,194 58,687 66,166 95,346 105,918

124