WORKING CAPITAL MANAGEMENT OF NEPAL

DOORSANCHAR COMPANY LIMITED

A Project Report Proposal

By:

Sunita Thapa Magar

T.U Registered Number

7-2-527-2-2018

Roll No: …………..

Rehdon College
Finance Group

Submitted To:

The Faculty of Management

Tribhuvan University

Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Samakhusi, Kathmandu

January, 2023

1
 'Background'
The term working capital implies a company investment in short term assets cash, short term
securities, accounts receivable and inventories. Precisely, these assets are financed by short
term liabilities, thus networking capital is current assets less current liabilities. Working capital
management is the decision relating to working capital and short term financing, and this
includes managing the relationship between the company’s, short term assets and its short
term liabilities. This enables the company to continue operations and to have enough cash flow
at its disposal to satisfy both maturing short term debt and upcoming operational expenses,
which is the major objective of working capital.

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 part 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 possible in working capital.

Statement of the Problem

Working capital plays vital role in the manufacturing company as well as trading company for
smooth production and market operation. The large holing of current assets consumes more
funds, which cannot be used for other purpose and thus involve high opportunity cost but
strengthens firm's liquidity position, reduces risk and overall profitability, as idle investment
earns nothing.

In Nepal, it is found that least attention has been given to this important segment. Working
capital management in Nepal is probably the weakest aspect of manufacturing/trading
companies. It is not in common practice in Nepalese industries for controlling physical as well as
financial dimension of working capital. Nepal Telecom is a telecom service provider company,

2
so the company may suffer from working capital management problems. The study has tried to
address the following research questions:

i. What is the relationship between sales and debtors, purchase and creditors of working
capital?
ii. ii. What is the level of inventories, receivable, cash, advances, creditors maintained by
Nepal Telecom at different time period?
iii. iii. What is the relationship between working capital and profitability?

Objectives
Working capital management is important instrument for any organization. Success or failure of
any organization depends on in its investment in current assets. 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 working capital policy of the company.

2. To examine the types of inventory policy adopted by the company.

3. To analyze the relationship between working capital management and profitability of

company.

4. To analyze the liquidity position of the company.

5. To explore the types of inventory policy adopted by the company.

Limitation of the study

• This study is based on case; findings may not be applicable for other organizations.

• Since the study is completely based on historical cost accounting, accuracy of the findings
largely based on the accuracy of the accounting records. The accuracy of the results is
dependent also on the data provided in the audited annual report.

• The study has considered only quantitative factors in order to get the result of the study.

• This study will be limited to the working capital management of the company which is sample
to study about the working capital.

3
Rational
The study will be focused on working capital management of company. The tradeoff between
profitability and liquidity will be analyzed. Profitability will be measured in term of return on
sales, return on assets and return on equity. Liquidity position plays vital role to manage the
working capital liquidity position shows the ability to pays 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. The major significance of
the study of it is important for following reason:

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. 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 successful in this area.

4. The relation between sales, growth and invest in current assets is closed and direct.

Review
The literature will include the conceptual framework of the related topic and writers and deal
the general concept of write and thesis towards the working capital management. This will
include opinion of different writers regarding with the thesis topic. It will concern with the
concept of working capital management and other related previous thesis with working capital
management and research gap.

Related theories
The theory of working capital management contends that if working capital is managed
according to prescriptive theory then it would be expected that business would invest in
working capital, finance working capital, managed cash, account receivable, inventory analyze
performance to ensure that long term assets are utilized effectively and efficiently.

Shrestha, 1983: In this study “working capital management in public enterprises,” states that
manager often lack 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 enterprises. 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 Nepal. And those revealing favorable turnover have still problem of managing account
receivable.

4
Acharya, 1985: In his study entitled,” A comparative study of problem in management of
working capital in Nepalese enterprise”. He has stated that in 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 toward the management of working capital rather than in any area. In his number of
studies it has been repeatedly found that the gross efficiency exists in the operation of public
enterprises.

Pradhan (1986), In his study entitled “Working capital management of selected manufacturing
PEs of Nepal”. His study concerned with interrelationship that exist between managing CAs and
CLs. The study managed to focus on networking capital concept. The study has employed ratio
analysis discriminate analysis and econometric models for its analysis. 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. It seems that Nepalese firms are following conservative
approach in financing as well as investing working capital.

Review of previous work :

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 by reviewing the studies done
by different management experts. It make more relevant and to add input in this study some
international studies are also reviewed. As it possible to estimate working capital accurately,
the firm must decide about level 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. The financial manager
should determine the optimum level of current assets so that the wealth of shareholder will be
maximized. In fact, optimum level of each type of current assets should be fixed.

Methods
Research methodology deals with the systematic theoretical analysis of the methods applied to
a field of study. It comprises the theoretical analysis of the body of methods and principles
associated with a branch of knowledge. This section deals with research design, population and
sample of the study, nature and resources of the data, definition of the variables, methods of
analysis and the limitation of the study.

 Research Design
Research design should be selected based on research objectives, hypothesis is, and nature of
the research and availability of the resources. The study will use descriptive and causal research

5
design. Descriptive research design will help to understand the current phenomena and also
describe the facts and characteristics related to the research problem. Similarly, casual research
design will be used in the study to identify the extent and nature of the cause and effect
relationship.

 Population and sample of the study

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. 

 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. 

Methods of Data Analysis

A method of Analysis helps to process raw data into the knowledge. Mainly, there are two
methods of data analysis namely qualitative technique and quantitative technique. But this is
study, two types of analytical tools are used .They are Financial tools and Statistical tools.

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 weakness as well as its
historical performance so that the current financial condition can be determined. 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. 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):

6
The ratio of current assets to total assets indicates what percentages of the company’s total
assets are invested in the form of current assets. It is calculated as:

Current Assets
CATA=
Total Assets

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 andcan be
calculated as:

Current Assets
CAFA=
¿ Assest

If the ratio is large, it indicates the sound working capital.

B. Liquidity Ratio Analysis:

Liquidity is a combination of all potential liquid resources that are available for the company to
meet their payment obligations. According to professional literature solvency is defined as the
readiness of the business subject to undertake payment of their obligations at the time of their
reimbursement and therefore is one of the basic conditions of the company’s successful
existence. Liquidity ratio measures the firm's ability to satisfy its short-term commitments out
of current or liquid assets. These ratios focus on current assets and liabilities and are used to
ascertain the short-term solvency position of a firm. The two primary tests of liquidity are
current ratio and quick ratio.

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.

7
It is calculated as below:

Current Assets
Current Ratio (CR)¿ Cureent liabilities

For many types of business, 2:1 is considered to 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.

Current Assets−Inventory
Quick Ratio (QR)=
Current Liabilities

Generally, the quick ratio of 1:1 of company is considered to be satisfactory.

C. Profitability indicators Analysis:

The indicators of profitability are designed as the business subject’s economic result rate
(output) to a comparative item (input). These indicators tell us at what level is the business
subject able to reach profit with the help of the capital used. The major profitability indicators
are Net Profit Margin (NPM), Gross Profit margin (GPM), Operating Ratio (OR), Return on Asset.

i) 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.

Net Profit After Tax

NPM= × 100
Sales

This ratio is the overall measurement of the company’s ability to earn net profit. A 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.

ii) Gross Profit Margin (GPM):

8
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.

Gross Prifit
GPM= × 100
Sales
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.

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.

Cost of good sold +Operating Expenses

¿= ×100
Sales

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 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 total assets.

Net Profit After TXa

ROA= ×100
Total Assets

2. Statistical Tools:

The statistical tools are essential to measure the relationship of two or more variables. The
statistical tools are as follows:

i) Arithmetic Mean (Average):

The arithmetical mean is the most popular and commonly used measure of central tendency,
which represents the entire data by a single value

9
It can be calculated as follows:

X=
∑X
N

Whereas,

∑ X =Sum of the values

X=Mean value

N=Number of the value

ii) Standard Deviation (S.D):

Standard Deviation is the most popular and useful measures of the dispersion and gives
uniform, correct and stable result. The formula of standard deviation is as follow.

Standard Deviation(σ )=
√ ∑ ( X −X )2
N

Where,

X=Variables

X =Actual mean of the variable

iii) Co- efficient of variation (CV):

The coefficient of variation (CV) is the ratio of the standard deviation to the mean. The higher
coefficient of variation, the greater the level of dispersion around the mean. It is generally
expressed as a percentage.

σ
CV = × 100 %
X

iv) Correlation Coefficient (r):

Correlation Coefficient is defined as the association between the dependent variable and
independent variable. If the two variable are so related the change in the value of dependent
variable them, it is said to have correlation coefficient .The correlation analysis between Return

10
on assets, Current ratio, Receivables Turnover ratio, Quick Ratio, Current Assets turnover Ratio
and Payable Turnover Ratio of Nepal Telecom for the study period. The formula for calculating
Correlation co-efficient (r):

N ∑ XY −( ∑ X )( ∑ Y )
r=
√ N ∑ X −( ∑ X ) × √ N ∑ Y −( ∑ Y )
2 2 2 2

The relationship between variables is positive if the value of 'r' is greater than 0 and it is the
relationship between variables is less than 0.similarly, if the value of 'r' is +1, the relationship is
perfect positive and if it is -1, the relationship is perfectly negative.

V. Regression Analysis:

Regression analysis is a set of statistical process for estimating the relationships among
variables. It helps to understand how the typical value of the dependent variable changes when
any one of the independent variables is varied, while the other independent variables are held
fixed.

Regression line of y on X 1 and X 2 (Used to estimate value of Y from the value of X 1 and X 2

It is given by:

Y =a+b1 X 1+ b2 X 2

Where,

Y=Dependent Variable i.e.Net Profit

X 1 and X 2 =independent Variable

a= Constant

b 1 =the partial regression coefficient of y on X 1 keeping X 2 constant

b 2 =the partial regression coefficient of y on X 3 keeping X 2 constant

11
Conclusion
The term "working capital management" is a very sensitive area of financial management
abundantly used by trading sectors to improve their efficiency for the betterment of their
organization "A study of working capital management of Nepal Telecom" is an exciting and
challenging study. The basic objective of this study is to examine the management of working
capital position of Telecom Company. The introductory part of this study presents the brief
introduction of the study, industrialization and its role in Nepal, its importance in Nepal and
Nepalese industrial enterprises and the brief introduction of Nepal Telecom. The theoretical
concept of Working Capital role and its importance in Service Company like Nepal Telecom. The
statement of problem of this study in light of Nepal Telecom, objective of the study and
limitation within which the study is circled are also the basic parts. The review of literatures
gives the basic concept of working capital, where different views of various different authors
are reviewed, then the journals and articles which are available, published by different
management experts, are also reviewed in order to fulfill the basic need of study. Further the
available dissertations in the context of management of working capital from different
researchers are also reviewed. Main findings and conclusions, tools used for analysis and
recommendations are included from the dissertations of the researchers. The review of
literatures tries to find out the gap and this study tires to fulfill this gap to some extent.

References

Altman E.I. (2000). Zeta analysis: A new model to identify Bankrupted Risk Corporations, Journal
of banking and finance.

Pradhan, J. (2002). Information Technology in Nepal: what role for the government? The
electronic Journal on information system in Developing countries.

Acharya, k. (2008). Problems and impediment in the management of working capital in

Nepalese Enterprises, New Delhi: National Book Organization.

Bhattarai, M. (2010) Nepal ICT scenario opportunities and challenges. High level commission for
information technology, Government of Nepal.

MoCIT (2019). Digital Nepal Framework, unlocking Nepal’s growth potential, Government of
Nepal Ministry of communication and Information.

12