CHAPTER-I

INTRODUCTION
1.1 Background of the study

Insurance is a contract by which one party, for a compensation called premium,

assumes particular risk of the other party and promises to pay to him or his
nominee a certain sum of money on a specified contingency.
The insurance industry provides financial protection against various kinds of
losses, such as accidental death, fire, sickness and injury, or loss of income. The
industry has two main components: one is insurers that underwrite insurance
policies, assuming financial risk and other is insurance agents or brokers who sell
insurance policies to businesses and individuals. Insurers are generally large
companies, although many small insurers actively compete for a piece of the
insurance market. Insurance agents are only mediators of insured and insurer;
generally they are employees of other companies or self-employed professionals.
The term reinsurance also play essential role in insurance business. It is
meaningless to imagine insurance business and unable to survive without
reinsurance. Insurance companies are not capable to bear huge sum assured of
policies for potential incidents and losses occur from catastrophe like earthquake,
flood, storm etc. In other words, reinsurance is a contract or agreement in which a
part of the risk, which an insurance company has insured is transferred to another
insurance company. Reinsurance means the insuring again by the insurer of a risk
already insured.

1.1.1 Profile of the Organization

Nepal Life Insurance Co. Ltd.

(Established under company act 2053 and Insurance Act 2049 in 4 th of May 2001),
is one of the esteemed and pioneer Private Life Insurance Company. Triveni
Group, the promoters of the Co. are reputed business houses and enlightened

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persons of the Country, so the financial situation of the Co. is always stable. It is
the first and the only Insurance Co., which has been given license to transact life
insurance business exclusively and is solely invested by Nepalese citizens. The
company has Rs 1,000,000,000 authorized capital and Rs. 300,000,000 paid up
capital out of which 80% has been fully paid up by 45 promoters and the
remaining 20% shares have been opened to the general public within one year
form the commencement of the Co. The company only provides life insurance. It
is the first Nepalese life insurance Company invested by only Nepalese investor.
Now it has 9164 public shareholders. It has its own 6 storied building with area of
3-13-2 at Kamalpokhari, Kathmandu.

NLIC has always been committed to providing a quality service to its valued
customers, with a personal touch. All customers are treated with utmost courtesy
as valued clients. To further extend the reliable and efficient services to its valued
customers, recently it has provided unique service for deposit insurance premium
in any of these Finance Companies: - Birgunj Finance, Mahalaxmi Finance,
National Finance and Guheshwori Finance. All these factors give the company
customers' confidence; financial strength and technical knowhow to ensure steady
growth of the company, good returns on policies and efficient customers' service.

1.2 Statement of 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 HMG 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 (Acharya, 2011).

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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. In most enterprises the
management of working capital has been misunderstood as the burdening of
money rather than its efficient utilization. So, they must select the type of current
assets suitable for investment in proportionate percentage to raise their operational
efficiency. The efficient management of working capital is useful for every
organization over investment, unpredictability of firm, whereas mismanagement of
current liabilities will have a negative impact on both cost of capital and risks of
the organization. Followings questions arise regarding the problems relating to
working capital management in this study:

i. What is the working capital position in term of components of current

assets of NLIC?
ii. What is the liquidity and profitability position of NLIC?
iii. What is the relationship between working capital management and
profitability of NLIC?

1.3 Objectives of the Study

The main objectives have been analyzing working capital management of NLIC.
But some specific objectives will be as follows,

i. To analyze the size and structure of working capital and relationship

between them of life insurance company with special reference to NLIC.
ii. To analyze the relationship between operating income and different
variable of working capital or turnover position of NLIC.
iii. To check the efficiency of working capital of NLIC.
iv. To see the trend of different variables of working capital and there
composition with others.

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1.4 Rationale of the study

Nepalese business environment is the threshold of challenge. In this situation, a

firm adopts suitable strategies for its existence. The success or failure of business
organization depends on its strategies which depend upon working capital. It is life
blood of the company. Adequate and inadequate working capital may harm
company because it directly affects on liquidity and profitability of the company.
They should balanced and coordinate the different functional areas of business
concern. Therefore, proper working capital management is very difficult task for
financial manager. This study will be helpful to NLIC to know liquidity and
profitability position. It is guideline to manage balance and coordinate its day
operation and to maintain optimal level of working capital in the future. This study
may be valuable for the researcher, scholars and the students who want to
investigate about the working capital management. Working capital management
is being difficult task for managers because it covers the broad area. Most of
studies related to working capital will be conduction manufacturing company and
no studied could be found that is conducted on life insurance companies. So, such
study is needed to observe the management of working capital on such companies
and suggest if required.

1.5 Review of Previous Studies

This chapter is considered to the review of major related literature about the major
financial activities of life insurance companies in more details and descriptive
manner. It provides the foundation for developing a comprehensive theoretical
framework to the field of research in order to explore the true facts for the
reporting purpose. This chapter reviews some basic academic courses, books,
journals, articles, web search and annual reports and some research paper. In an
effort to gather information some of the master's degree dissertation related to the
topic has also been reviewed. In addition to independent studies carried out by

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well know experts and others are also taken into consideration. The review of
literature is further classified as:

1.5.1 Conceptual Framework

Life Insurance Business is extremely vast different in character compare to other

manufacturing and non-manufacturing business and it is long-term business, the
company should not take its financial decisions focusing on present condition and
traditional basis of insurance business. In this 21st century, we have modern
mechanism of Accounting, Financial and Statistical tools to evaluate the long-term
effects from kind of any financial decision required and the existing and up-
coming life insurance companies should follow such mechanism.

Financial Analysis provides the clear vision about competency of the selected
organization and helps to make roadmap for future action planning. As life
insurance is different type of business, it has different type of revenue and
expenditure account heads too compare to other. To discern about life insurance
businesses and compare them, definitely the briefly analysis of whole transactions
applied by life insurance companies is required.

The conceptual framework involves defining the concept and theories of relevant
studies made to this date so it includes meaning of insurance, evolution of
insurance, types of insurance, meaning of concept of gross working capital,
concept of net working capital, classification of working capital, need of working
capital, importance of working capital, determination of working capital, financing
of working capital, working capital financing & investment policy and working
capital cash flow cycle.

1.5.2 Review related studies

K. Shrestha (2012), In his article, “working capital Management in public

enterprises: A Study on Financial results and Constraints.” he measured ten

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selected public enterprises working capital needs focusing on liquidity, turnover
and profitability position of that public enterprises. In the analysis, he found that
four public enterprises had maintained adequate liquidity position; two public
enterprises had excessive liquidity position and rest four public enterprises had
failed to maintain desirable liquidity position. About turnover, two public
enterprises had negative working capital turnover, four had adequate turnover, one
had high and remaining three public enterprises dot not seem achieve satisfactory
turnover of net working capital. Among these, four public enterprises were
operating in loss and rests were on profit. After analysis these constraints, he had
brought following policy issues.

i. The managers of Public enterprises were being unable to give attention to

working capital management.
ii. Public enterprises are being unable to show positive relationship between
turnover and return on net working capital.
iii. There is a lack of suitable financial planning for determining their working
capital needs in public enterprises.
iv. There exists no proper consistency between liquidity position and turnover
of assets.
Pradhan (2013), has jointly conducted a study on, “working Capital Position of
selected Corporations of Nepal”. For the study they selected five manufacturing
and six non-manufacturing enterprises. The study was concentrated on the size of
investment, trends on investment; need to control the investment on current assets
management. Published article had used only primary data and distributed 200
questionnaires. The topic of the article was “Some Reflection on Working Capital
Management in Nepalese corporation.”

Major finding of study were,

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 i. Inventory management was of great significance in manufacturing
corporations and the management of cash and receivable was of great
significance in non-manufacturing corporations.
ii. Both working and fixed capital was found to be difficult to manage in
manufacturing corporations but in service organizations working capital
was found to be more difficult to manage as compared to fixed assets.
iii. The major reason for holding inventories is to facilitate smooth operation of
production and sales.

His suggestive measures to overcome from the above policy issues were;

i. Identification of needed funds.

ii. Regular checks.
iii. Development of management information system.
iv. Positive attitude towards risk and return.
v. Determination of right combination of short term and long term sources of
funds to finance working capital needs.

K. Acharya (2014), “problems and impediment in the management of working

capital in Nepalese enterprises” he said that working capital management,
especially in public sector, has been a relatively weak area. He has described
operational problems as well as organizational problems faced by the
organizations. Some of these problems are;
Operational Problems
i. Slow inventory turnover.
ii. Change in working capital may low impact on profitability.
iii. Current liabilities can increase largely than current assets.
iv. They had not followed the conventional proportion of debt and equity as 1:1.
v. Absent of apathetic information management system.

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vi. The performance evaluation tools and techniques like break even analysis,
funds flows analysis, ratio analysis were either undone of ineffective in
most public enterprises.
vii. Monitoring of the proper functioning of working capital management has
never been considered a managerial job.

Organizational Problems

i. Lack of regular evaluation of financial results as well as regular internal

and external audit system.
ii. Most of the public enterprises being unable to present their capital
requirements with proper justification.
iii. Functioning of finance department was not satisfactory.
iv. Some public enterprises are facing the problems of under utilization of
capacity.

1.6 Research Methods

This part of the study deals with the methodology adopted for the completion of
the study. Research methodology refers plan structure and strategy of investigation
conceived to answer the research question. This chapter explains the methodology
used in this study. Research Methodology is the process of forming new
knowledge for the solution of the problem, which is not existed already.

This study aims at presenting, evaluating and findings about overall financial
activities related to selected companies and compare each other's position &
aspects. To accomplish this goal, the study follows the research methodology
described in this chapter as such:

1.6.1 Research Design

A research is the arrangement of conditions for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy in
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procedure. This research attempts to analyze the primary information (opinions of
the respondents) as well as secondary data. As per the nature of the study,
historical research and survey research designs are used to accumulate and analyze
views and reaction of the respondents. In other hand to drag out better result of
this study, various financial ratios are used as well as to analysis various aspects of
this study analytical research design is used.

1.6.2 Population and Sampling

There are 25 insurance companies in insurance business sector and nine of them
providing life insurance service. Only eight companies are providing life insurance
service. NLIC is one of the most popular insurance companies providing life
insurance service. In this study NLIC has been selected to study working capital
management for five fiscal years.
Population of this study

i. Nepal Life Insurance Co. Ltd. (NLIC)

ii. Rastriya Beema Shasthan
iii. American Life Insurance Co. Ltd. (ALICO)
iv. National Life Insurance Co. Ltd.
v. Life Insurance Corporation Nepal Co. Ltd.
vi. Asian Life Insurance Co. Ltd.
vii. Gurash Life Insurance Co. Ltd.
viii. Surya Life Insurance Co. Ltd.
ix. Prime Life Insurance Co. Ltd.

Sample of this study

i. Nepal Life Insurance Co. Ltd. (NLIC)
Population size =9
Sample size =1
Sample percentage = 11.11%

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1.6.3 Nature and Sources of Data

To fulfill the objectives of the study, a definite series of analysis is introduced. The
research will be base upon the description of the primary and secondary data for
the historical performance assessment and the future prediction of planning and
upcoming policy and implementation among the insurer. Hence, the primary and
secondary data will be use for the analysis and drawing a valid conclusion. The
major sources of data will be collect.
i. Quarries with the concerned personnel of NLIC and Insurance Board.
ii. Bulletins and Annual reports of insurance board.
iii. Browsers and Annual reports of NLIC
iv. Available web site of related organization.
v. Library of different colleges and from central library.
vi. Important information collected from Insurance News & Views, Beema
Sandarva, different magazines & books, different business programs from
T.V. & Radio etc.

1.6.4 Data Collection Technique

For primary data information is collected by visiting concerned organization and

consulting with authorized personnel like; D.G.M., Chief Marketing Manager,
Divisional Manager, Deputy Manager, Sr. Branch Manager, Finance Officer,
Administrative Officer, Account Officer, R/I Officer, Supervisor, Co. Secretary
etc., who were available at the visit hours. In other hand secondary data is also
available by collecting Annual reports, economic bulletins and browsers, during
visit these organizations. To get more reliable information, discussions were held
with respondents. Discussed information was really important to analyze and
interpret the data on study time. According to necessity of study telephone
interviews were also held as well as visit to concerned web site. Purpose of obtain

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or drag out better result available, data information are rechecked and transformed
them in easy way to analysis and easy to understand.

1.6.5 Data Processing Procedure

Methods of analysis are applied as possible in statistical basis. Due to poor

database, the data obtain from the various sources cannot be directly used in their
original form, the main problem is accounting system maintained and shown in
annual report of life insurance companies are different as their own view. Further
they need to be verified and simplified for the purpose of analysis. The obtained
data are presented in various table, diagram and charts with supporting
interpretations.

1.6.6 Tools and Techniques of Analysis

Use of appropriate tools in analysis of collected data, shows the clear revelation
about the study and also shows the efficiency and effectiveness of the study. So to
expose collected data in clear vision different Accounting, Financial and statistical
tools are used for analysis of data in this study. For the purpose of best effort on
presentation of collected data, analysis is classified into 3 types of analysis.

a) Financial Tools

"A widely used tool for the financial analysis is ratio analysis. It is defined as the
systematic use of ratio to interpret the financial statement so that the strength and
weaknesses of firm as well as its historical performance and current financial
condition of can be determined." (My Khan & P. K. Jain, Financial Management,
3rd edition -Tata Mc Graw Hill Publishing Company Ltd, New Delhi 1999. P.
117)

The weakness of management and strength of it can be found through ratio

analysis. So, an organization should use this tool to know about its situation and to
take corrective action. In order to bargain more effectively for outside funds, the
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management of a firm should be interested in all aspect of financial analysis that
outside supplier of capital use it is evaluating the firm. Following ratios can be
analyzed to determine financial position of an organization.

i. Liquidity Ratios:

Liquidity ratios are used to measure the firm's ability to meet the short term
solvency of the company. There are mainly three types of liquidity ratios.

Current ratio: - current ratio is the relationship of current assets and the current
liabilities. The current assets are those assets, which can be converted into cash
within short period i.e. one year. Current assets includes inventories, cash in hand,
cash in bank, bills receivables, account receivables, marketable securities, prepaid
expenses, short term loan and advance etc. and currents liabilities includes bills
payables, cash payable, cash credit, outstanding expenses, bank overdraft etc. The
ratio shows that the firm's current position to pay its current obligation. Higher
ratio shows the favorable position of the firm. The standard of this ratio is taken as
2:1. Lower the ratio indicates unfavorable position of the firm. This shows the
solvency position of the business is not good.

Currents Assets
Current Ratio=
Current Liabilites

Quick Ratio/Acid-Test Ratio or Liquid Ratio:- All the current assets are not
equally liquid so quick assets does not include those current assets which are not
converted in short period the example of these assets are prepaid expenses and
inventories.

Absolute Liquid Ratio:- Although current assets like receivable, marketable

securities etc. can be changed into cash as required; it takes a time to be changed.
It means it is not absolute liquid. The absolute liquidity ratio measures the

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liquidity position of the firm in absolute term. Following is used to calculate
absolute liquidity ratio.

Cash
Absolute Liquid Ratio =
Current Liabilities

b) Statistical Tools

Generally the statistical tools are used for attaining accuracy on analysis and study.
The major tools of statistics like Mean, Standard Deviation, Coefficient of
Variation, Coefficient of Correlation, Probable Error and different Charts are used
to present effectively the analysis done.

Mean

Mean ( x́ )=
∑x
N

Mean is used for measurement of central tendency. The average measures which
condense a huge mass of data into single value representing the whole data. Mean
is average of data which is the typical value around which most of the data tend to
cluster.

Standard Deviation

∑ ( x−x́ )2
Standard Deviation ( σ )=
√ N
The measurement of the scatter-ness of the mass of figures in a series about an
average is known as dispersion. Standard deviation is the absolute measure of
dispersion in which the drawbacks presents in other measures of dispersion are
removed. Standard deviation is mean of the mean. A small standard deviation
means a high degree of uniformity of the observations as well as homogeneity of a
series, a large standard deviation of different ratios is calculated.

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 σ
Cofficient Variation ( c . v )= ×100
X
The coefficient of Variation is the relative measure of dispersion, comparable
across distribution which is defined as the ratio of the standard deviation to the
mean expressed in percent. It is used for comparing variability of two series or set
of data with the same of different units and is expressed in percent since it is
independent of units. So, two distributions can bitterly be compared with the help
of coefficient of Variation for their variability. Less the C.V., more will be the
uniformity; consistency etc. and more the C.V. less will be the uniformity,
consistency etc.

Correlation (r)

The correlation is the statistical tool that we can use to describe the degree to
which one variable in linearly related to another. The coefficient of correlation
measures the degree of relationship between two sets of figures. Among the
various methods of finding out coefficient of correlation, Karl Person's (product
moment) method is applied in this study. The result of coefficient of correlation
always lies between '+1' of '-1'. After getting the value of r, care should be taken to
interpret; otherwise wrong conclusion may be obtained. However, the following
general rules are mentioned for interpreting the value of r.

Now Correlation Coefficient (r) = n ¿ ¿

Interpretation,

 When r = 1, there is perfect positive correlation between two variables.

 When r = -1, there is perfect negative correlation between two variables.
When r = 0, there is no correlation or the variables are uncorrelated.
When 'r' lies between 0.7 to 0.999, (-0.7 to -0.999) there is high degree of positive,
(or negative) correlation between two variables.

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When 'r' lies between 0.5 to 0.699 there is moderate degree of correlation between
two variables.
When 'r' lies in less than 0.5 there is low degree of correlation between two
variables.
1−r 2
Probable error ( P . E )=0.6745×
√n
Probable Error of the correlation coefficient denoted by P.E. is the measure of
testing the reliability of the calculated value of 'r'. If 'r' be the calculated value of r
from a sample of n pair of observation, then P.E. is defined as above. It is used in
interpretation whether calculated value of 'r' is significant of not.

Where,

r = Correlation co-efficient

n = Number of pairs of observations

P. E. is used to interpret whether the calculated value of r is significant or not.

If r < P.E., it is insignificant. So, perhaps there is no evidence of correlation.

If r > 6P.E., it is significant.
If P.E.< r < 6, P. E. is nothing can be concluded

1.7 Limitations of the study

This study will be mainly base on the secondary data which will be collecte from
web-site, books, financial statement and annual report of the company. Moreover,
the study covers the information of only five years, which available in its web-
sites and annual report. Due to time and resource constraints, the study will be
conduct with the following limitations:

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 i. This study will be base on secondary source of data. Thus no effort will be
make to verify the data provided by the NLIC and other corporate bodies
from their official records.
ii. This study will be fully base on the student's financial resources and is to be
completed within limited time from the view point of submission in partial
fulfillment of the requirements for Bachelors in Business Studies (BBS).
iii. Unavailability of sophisticated computer software to carry out
comprehensive test of all the methodologies.

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 CHAPTER-II
RESULT AND ANALYSIS
2.1 Data Presentation
The success of failure of enterprises largely depends upon management of working
capital, a crucial aspect of financial management. Shortage of fund, regular cash
flow, blocking of funds in receivable for long period are the general problems
faced by enterprise due to the proper management of working capital.
Management of proper combination of working capital is possible only after
systematic analysis of its different aspects. The analyses of working capital
enables management of detect trends and take corrective steps if needed.

As mentioned introduction chapter, the main objective of the study as to analysis

the working capital management of NLIC. This chapter includes size, structure
and utilization of current assets, liquidity and profitability position relation
between current assets and total assets as well as fixed assets.

2.1.1 Analysis of Composition of Working Capital

According to the nature of the business and attitude of management towards risk,
different organization use different types of current assets. Firm having risk
adverse management, maintain the high liquid assets in its total working capital
and vice versa. The business firm that aims to maximize return on shareholders'
investment should earn sufficient returns from its operation, which depends upon
the volume of the sales and to increase sales level, optimum current assets is
required. The effective composition of the current assets has the greater impact on
the whole working capital management as well as the success and failure of the
organization. Excess current assets increase cost and low current assets decrease
profitability.

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Position of Current Assets

Business organization requires fixed as well as current assets for long term assets
i.e. durable assets, fixed assets should be invested and to run day to day business
activities, short term assets like cash receivables etc should be invested. The total
of these short term assets are known as working capital. It is hard to find business
organization without working capital.

Since the productive sales and cash flow are not instances a firm needs working
capital (gross). The firm needs cash to purchase row material and pay expenses as
there may not be project matching between cash inflow and cash outflows. Cash
may also be held to meet the future expenses. The stocks of raw material are kept
in order to ensure smooth production and to protect against the risk of non
availability of raw materials.

Maximizing return on shareholders' investment is ultimate goal of an organization.

Business organization should earn sufficient return in its operation to maximize
shareholders wealth. Only successful sales activities ensure earning, a steady
amount of profit. The firm has to invest enough funds in current assets for the
success of the sales activities because sales do not convert into cash instantly.
Therefore efficient management of current assets, an internal part of overall
financial management and has the greater impact on maximization of owner's
capital. So, it is necessary to have proper analysis of current assets reflects the
nature of performance and operation of its management. Therefore firstly the
overall current assets are analyzed.

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 Table - 2.1
Nepal Life Insurance Co. Ltd.
Current Assets
Particulars FY2070/71 FY071/72 FY2072/73 FY2073/74 FY2074/2075
Cash And Bank
31204491 44336206 65476241 83727602 99772308
Balance
Short Term
127135130 219889126 356873499 155334365 151554486
Investment
Deposits 221831 228831 249931 15620197 13607324
Short Term
45656846 34197233 47645824 841213 1276425
Loans
Sundry Debtors 916012 546846 265125 1978315 38098
Miscellaneous
3339 292519 206339 494186 1345213
Stock
Source: - Annual Report

This table represents current assets position of Nepal Life Insurance Co. Ltd.
NLIC'S current assets consist investment, cash and bank balance, sundry debtors
and others.

This table represents the pattern of current assets of NLIC and their fluctuation
year after year. As per the table, short term investment is more than others. Short
term loans and cash and bank balance are other important current assets. There is
no need of inventory since it is service providing organization providing insurance
servicing.

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Size of Working Capital

The success and failure of any organization depends upon the proper management
of current assets. These assets must be maintained at a level that can adequately
cope with the volume of business activities. The policy of any firm regarding the
total amount of current assets, required to support he given level of sales is
referred as current assets policy of that firm. The current assets policy of the NLIC
has been analyzed here in term of size of the current assets in total assets and its
relationship with fixed assets. The size of any enterprise should neither be higher
nor low. That means the working capital adequate. High working capital means
high level of liquidity but low profitability. Low working capital means high level
of profitability and poor liquidity position. Poor liquidity position can not maintain
the activities of corporation. Here the level of currents assets is measured by
different five ratios. In order to study the size of working capital of NLIC, those
five types of ratios are calculated as under.

i. Current Assets to Total Assets

ii. Current Assets to Fixed Assets
iii. Current Assets to Operating Income
iv. Net Working Capital to Current Assets
v. Net working Capital to Operating Income

i. Percentage of Current Assets to Total Assets

This ratio can be analyzed to study the composition of working capital of the
company. It expresses the gross working capital portion that is held on Total
Assets. Higher percentage of current assets in total assets shows the greater
liquidity position of the firm and low risk of technical insolvency and vice-versa.
The table given below represents the percentage of current assets on total assets.

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 Table - 2.2
Percentage of Current Assets to Total Assets
FY Current Assets Total Assets Ratio (% of CA on TA % change
2070/71 205137649 1249080027 16.42%
2071/72 299490761 1868631456 16.03% (0.39)
2072/73 470716959 2568693535 18.33% 2.3
2073/74 344395156 3197295412 10.77% (7.56)
2074/75 358416025 4503401500 7.96% (2.81)

Total 1678156550 13387101930 69.51% (8.46)

Mean 335631310 2677420386 13.90% (2.12)
C. V. 25.62% 39.95% 27.97%
Source: - Annual Report

This ratio indicates the proportion of current assets investment to total investment
in assets of NLIC for selected period. Above table shows the proportion of current
assets on total assets is increasing except on the year 2073/74. In the fiscal year
2072/73 the proportion has increase by 2.3% which seems very fluctuating. In an
average there is 13.9% participation of current assets on total assets with 27.97%
variation on it & its increasing trend is (2.12%) each year during the study period.

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 Figure -2.1
Percentage of Current Assets to Total Assets

5000000000
Amount in Rs.

4000000000
3000000000 Current Assets
2000000000 Total Assets
1000000000
0
FY FY FY FY FY
061/062 062/063 063/064 064/065 065/066
2070/71 2071/72 2072/73 2073/74 2074/75
Year

Source: Table No 2.2

This relationship between current assets and total assets are not uniform i.e. the
increase in total assets do not necessary increase the proportion of current assets
on its composition. The graphic presentation shows above clarified the point. The
figure shows that two lines are not parallel. In order to test the significance of the
relationship between two variables (CA & TA) during the period of the study, Karl
persons correlation coefficient is calculated as follows.

Karl persons correlation coefficient is an effective way to interpret the relation

between two variables as it shows the effect of one variable amount on other. If
the value of correlation coefficient is 1, the variables are interrelated that is
increase in one variable increases other and if the correlation coefficient is -1, the
variables are negatively related to each other. From above table following value
has been calculated assuming current assets as X and total assets as Y.

r = 0.5114

PE = 0.228

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Above figure shows that correlation coefficient between Current Assets and Total
Assets during the study period is positive; r is more than PE so, the value of r is
significant, so that correlation is interpreted as positive correlation.

ii. Percentage of Current Assets to Fixed Assets

Every firm should invest in currents assets as well as fixed to support a particular
lever of business. So, the firm should determine the proper proportion of current
assets with fixed assets. The level of current assets can be measured by
relationship between current assets to fixed assets, which can help to understand
the current assets financing policy of the firm. Assuming a constant level of fixed
assets, higher current assets to fixed assets ratio indicates an aggressive current
assets policy, conversely lower ratio indicates a conservative current assets policy.
The two goals of financial management profitability and liquidity are directly
linked with the management of currents assets, with a decrease to the volume of
current assets, profitability increase but the liquidity declines and vice versa.

Table - 2.3

Percentage of Current Assets to Fixed Assets

Fiscal Year Current Assets Fixed Assets Ratio (% of % change

CA on FA
2070/71 205137649 98992745 207.22%
2071/72 299490761 164671996 181.87% (25.35)
2072/73 470716959 183355057 256.52% 74.65
2073/74 344395156 235052699 146.52% (110)
2074/75 358416025 327118749 109.57% (36.95)

Total 1678156550 1009191246 901.70% (97.65)

Mean 335631310 201838249 180.34% (19.53)
C. V. 25.62% 37.73% 27.92%
Source: - Annual Report

23
Above table shows the ratio of current assets on fixed assets. Fixed assets shown
in net of depreciation, which is increasing trend and current assets also increasing
trend except in fiscal year 2073/74. In average there is 18.034 times more current
assets with comparison to fixed assets but it's decreasing tend to average (19.53%)
every year. An average fixed asset is 201838249 on with 37.73% variation on it
and average percentage of current assets on fixed assets is 180.34% with 27.92%
Variation. The following figure shows the relationship between current assets and
fixed assets.

We can show the relationship between current assets and fixed assets through
graphical presentation.

Figure- 2.2

Percentage of Current Assets to Fixed Assets

500000000
400000000
Amount in Rs.

300000000 Current Assets

200000000 Fixed Assets
100000000
0
FY FY FY FY FY
061/062 2071/72
2070/71 062/063 2072/73
063/0642073/74
064/0652074/75
065/066
Year

Source: Table No 2.3

iii. Current Assets as Percentage of Operating Income
As life insurance business is long-term business and it is extremely different from
other business organizations. The main source to generate income in life insurance
companies is collected premium from its clients, which is returnable with certain
bonus amount to insured in maturity policies or in death of insured. Therefore, life
insurance companies cannot evaluate their profit without valuation by actuary and
24
 normally the valuation is proceeds for every three years. Here operating income
includes income from investment loan and others, transferred from life insurance
fund, written back provision and other incomes. Service based organization like
NLIC depends upon such operating income. The source under operating income is
not premium collection through different types of policy. The company should
make their insurance policy as per the resource availability and people's insurance
habit. Insurance policy greatly affects the financial policy i.e. the total assets
required by the company and the working capital required by the company to run
it as per plan. Here the coordination between them is very important; each and
every information's should pass through every unit. Increase in insurance
objectives certainly causes increase in all transaction for which there should
adequate amount of current assets. The amount of the current assets is also
affected by insurance policy of the company. If premium collection of the
company is slow, more working capital is required to meet daily requirement. On
the other hand if premium collection is fast, working capital requirement is low.

Table - 2.4
Proportion of Current Assets to Operating Incomes

Fiscal Year Current Assets Operating Income Ratio (% of CA on OI % change

2070/71 205137649 11615014 1766.14% -
2071/72 299490761 51396080 582.71% (1183.43)
2072/73 470716959 17391939 2706.52% 2123.81
2073/74 344395156 14747029 2335.35% (371.17)
2074/75 358416025 24168886 1482.96% (852.39)
Total 1678156550 119318948 8873.68% (283.18)
Mean 335631310 23863790 177.47% (70.80)
C. V. 25.62% 60.22% 41.32%
Source: - Annual Report
25
The table shows the relationship between operating income and working capital
(current assets) of NLIC. The tabulated data shows the fluctuating relationship
between them. Working capital is high in comparison to operating income.
Organization has increased working capital continuously expect fiscal year
2073/74 but operating income is not consistent. Operating income has increased in
fiscal year 2071/72 but decreased in fiscal year 2072/73 by large amount.
Similarly, the percentage of working capital to operating income is 1766.14% in
fiscal year 2070/71 but in fiscal year 2071/72 it has decreased to 582.71%. In
fiscal year 2072/73 operating income has decreased by a large proportion but
organization has increased its working capital.

Figure - 2.3
Proportion of Current Assets to Operating Incomes

500000000
400000000
Amount in Rs.

300000000 Current Assets

200000000 Operating Income
100000000
0
061/062 062/063 063/064 064/065 065/066
2070/71 2071/72 2072/73 2073/74 2074/75
Year

Source: Table No 2.3

The graphical presentation clarifies that the working capital is not in proportion to
sales. The sale is ineffective by the volume working capital kept by the company.
The curve of the sale is independent of the curve of working capital, it means two
are independent.

So as to get in touch with the probable relationship between working capital and
operating income of the NLIC during the period of the study, Karl Pearson's
correlation coefficient (r) has been calculated assuming,

26
 X = Current Assets
Y= Operating income
r = -0.056
PE= 0.30070

Above calculation shows the negative correlation coefficient between the current
assets and operating income during the study period. It shows that increased in
current assets have decreased operating income.

iv) Net Working Capital as Percentage of Current Assets

Net working capital represents the excess of current assets over current liabilities.
If the current liabilities are in excess than the current assets, the different is called
working capital deficient is the rule of finance that the working capital on a
business should be sufficient when compared to current liabilities. If a business
has low working capital or working capital deficit it must search new source of
working capital, otherwise current assets should be liquidated to pay of the current
liabilities. Following table presents the relationship between net working capital
and current assets of NLIC.

Table - 2.5
Proportion of Net Working Capital to Current Assets

Fiscal Year Net working Current Assets Ratio (% of % change

Capital CA on FA
2070/71 94868146 205137649 46.25%
2071/72 5213558 299490761 1.74% (44.51)
2072/73 18088951 470716959 3.84% 2.1
2073/74 219483928 344395156 63.73% 59.89
2074/75 173684253 358416025 48.46% (15.27)
Total 673738836 1678156550 164.02%
Mean 134747767 335631310 32.8%
C. V. 56.67% 25.62% 76.95%
Source: - Annual Report

27
It is evident from the table that net working capital has increased rapidly than
current assets. The tabulated data shows that both net working capital and current
assets are in fluctuating trend. The average net working capital is 134747767 with
56.67% variation on it. Similarly, the average percentage of net working capital on
current assets is 32.8% with 76.95% variation on it. Net working capital and
current assets can be shown in following graphical presentation.

Figure- 2.4

Composition of Net Working Capital & Current Assets

500000000
Amount in Rs.

400000000
300000000
200000000
100000000
0 Net working Capital
061/062
2070/71 062/063
2071/72 063/064
2072/73 064/065
2073/74 2074/75065/066 Current Assets
Year

Source: Table No: 2.5

v) Net Working Capital as Percentage of operating Incomes (sales)

Operating of service organization like NLIC can be increased through effective

sale the policies and properly use the fund. Sales policy depends upon financial
policy viz. current assets i.e. working capital policy. For example, if credit sales
increases, the working capital should also increase at the same level. Therefore, it
is necessary to evaluate the relationship between working capital and sales. The
following table shows NWC as sale's percentage.

28
 Table - 2.6

Proportion of Net Working Capital to Operating income

Fiscal Year Net working Operating Ratio (% of % change

Capital Income NWC on OI
2070/71 94868146 11615014 816.77% -
2071/72 5213558 51396080 10.14% (806.63)
2072/73 18088951 17391939 104.01% 93.86
2073/74 219483928 14747029 1488.33% 138.32
2074/75 173684253 24168886 718.63% (769.70)
Total 673738836 119318948 3137.88%
Mean 134747767 23863790 626.58%
C. V. 56.67% 60.22% 85.61%
Source: - Annual Report
The above table shows that net working capital and operating income both are
fluctuating trend. The ratio of net working capital over sales has increased from
10.14% to 1488.33% over the five year study period. The average ratio is 626.58%
with 85.61% coefficient of Variation. Net working capital is less then operating
capital only on fiscal year 2071/72.

Figure - 2.5
Composition of Net Working Capital & Operating income

250000000
200000000
Amount in Rs.

150000000 Net working Capital

100000000 Operating Income
50000000
0
061/062 2071/72
2070/71 062/063 2072/73
063/064 2073/74
064/0652074/75
065/066
Year

Source: Table No 2.6

29
Above graphical presentation clarifies the increasing net working capital is not
consistent with fluctuating operating income. Graph shows that they have no
relation.

2.2 Major Findings of The study

The major empirical findings of the whole study are presented as under;

i. Size of Working capital

The first part of categorized part of analysis deals with the size of the working
capital. The size of working capital largely affected the tradeoff between risk and
profitability of the corporation. So, it should neither be high nor be low. Above
analysis shows the low level of current assets in total assets that denote the less
liquid position of the corporation and higher risk technical insolvency. The
percentage of current assets on total assets is 13.90% on average with 27.92% of
variation on it. This ratio has decrease to 7.96% from 18.33% during the study
period. The size of total assets is increasing with the increase in current assets.
Such smaller investment in current assets indicates the aggressive current assets
policy of the corporation. The size of net working capital is in fluctuating trend.
The ratio net working capital to operating income is 626.58% on average during
the study period. It indicates less utilization of working capital where operating
capital is incomparably smaller than net working capital except in year 2071/72.

ii. Structure of Working Capital

Investment constitutes the most important and larger element of NLIC on current
assets. During the study period, 78.52% of current assets are held by investment.
Cash and bank balance in another important element of current assets that held
19.34%. Receivable covers a minute part of current assets i.e. 0.22%, it is in
decreasing trend except in fiscal year 2073/74. Misc. current assets constitute a
more significant element of NLIC's current assets which is 1.92% in average.

30
iii. Financing of Current Assets
Financing mix of NLIC has been analyzed in this part of analysis. The analysis
showed that the corporation has conservative working capital policy since it has
needed low level of working capital and working capital is of permanent nature.
More than 60% of total assets are financed by long term source of financing.
Therefore, most of the current assets are financed by long term sources. On
analysis, long term financing is far grater than fixed assets. Largest portion of long
term financing was supplied by life assured fund. There was no any long term loan
in any year of the study period. This indicates that corporation has eliminated its
external financing by using internal funds.

iv. Growth of Working capital

The growth trend of current assets is highly increasing than operating income. The
indices of current assets indicate that the speed of total assets is faster than of
operating income and current assets.

There is positive correlation between current assets and total assets but the
correlation of current assets with operating income is high degree of negative. It
clarifies that working capital is not always dependent on operating income but the
study shows that working capital is dependent upon total assets.

v. Efficiency of Working Capital

The efficiency of management of working capital has been assessed with the help
of operating income (sales). The sales of any organization affect the size of
working capital and reflect the efficiency of the firm to manage assets. The
volume of operating income and working capital is in fluctuating trend. So,
turnover ratios are almost fluctuating trend. Current assets turnover ratio decreased
to 0.0372 times from 0.172 times during the five years study period. Like wise,
cash & bank balance turnover ratio decreased to 0.18 times from 1.15 times,
receivables turnover ratio decreased to 7.45 times from 634.38 times and net

31
working capital turnover ratio is 0.067 times from 9.858 times. From the analysis
it is revealed that NLIC kept excess amount of working capital in comparison to
net sales, which cannot be considered as the sign of efficient management of
working capital in the organization.

vi. Profitability of Working Capital

Study of profit & loss account shows that the corporation is operating under the
net profit position. But, its profitability cannot be considered as sufficient with
compared to the increment in investment in current assets. The average return on
current assets during the study period is 3.34% with 52.89% of variation. It has
decreased to 1.62% from 5.1%. Return on net working capital is also decreased to
5% from 128.70%. Similarly, return on capital employed is also decreasing trend.
So, return on working capital has not provided satisfactory result. The profitability
position is being unsatisfactory.

vii. Liquidity Position

Liquidity ratios gave the result of good liquidity position of the NLIC. Current
ratio is

1.84:1 in average with 30.53% variation. It told that current ratio is almost in the
ratio of 2:1. Since there is no inventory in the firm, so quick ratio also same as
current ratio. Average absolute ratio is 0.37% with variation of 54.05%. Above
analysis shows that the corporation has so far greater current assets than current
liabilities in all years of observation that clarifies the better liquidity position in
NLIC.

NLIC was regular in profit. The relationship between profitability and liquidity
ratios shows that increase in liquidity reduce the profitability and decrease in
liquidity increase in profitability during the study period i.e. there is negative
correlation coefficient liquidity and profitability. That condition exactly meet the
proposition 'higher the liquidity, lower the profitability.

32
viii. Trend Analysis
All the variables that affect the working capital are in fluctuating trend except cash
and bank balance during the study period. Trend indices of cash and bank balance
highest among the different variables. This indicates huge piling up of ideal
amount of cash. Current assets have increased in a larger rate than total assets.
Receivable is also in fluctuating trend.

ix. Claim Analysis

Maturity and Survival benefit are the natural process of life insurance business.
But company is careful about death claim and surrender. The volume of death
claim and surrender is increasing every fiscal year. To eliminate death claim NLIC
should be conscious before accepting insurance proposals and NLIC should be
conscious about policy surrender and need to take improvable action and should
improve in policy making in favor to insured instead of give effort in sales only.

33
 CHAPTER - III
SUMMARY & CONCLUSION

3.1 Summary

An enterprise must benefit from its own knowledge and competence by applying
working capital techniques in its own organization for its betterment and
effectiveness. Working capital techniques should be used to improve efficiency of
the organization. Working capital management, a very sensitive area of financial
management is the main concern of the study and it related to Nepal Life
Insurance Company Pvt. Ltd. The main objective of the study is examine the
working capital policy of NLIC and the specific objectives are to analyze and
assess the size, growth, liquidity, profitability and efficiency of working capital
and thereby analyzing the overall management policy of working capital in NLIC.
For this purpose secondary data's are used to collect necessary information on
working capital and other related variables. The final statements for the period are
taken from website and direct visit of corporate office of NLIC. The available data
are tabulated and analyzed by applying various important financial and statistical
tools and techniques.

The size and structure of working capital is analyzed by comparing current assets
and its components with different related variables. Liquidity and profitability
ratios are calculated to evaluate the efficiency of working capital. Liquidity
position is assessed by calculating different liquidities ratios, viz. current ratio,
quick ratio and absolute liquidity ratio. The growth trend of working capital and its
related variables are studies in trend analysis. Different statistical tools like mean,
standard deviation, coefficient of variation, correlation coefficient and probable
error are calculated for the meaningful interpretation of data.

On average, 13.90% of total assets are in liquid form and has a large part of
current assets in the form of investment followed by cash and bank balance, misc.

34
current assets and receivables. Since, it is a service provider business company; it
does not need more working capital. So, a large part is tied up in form of
investment. Total assets and current assets are interrelated but there is no any
significant relationship between current assets and operating income. Current
assets are more in comparison to fixed assets and operating income.

Most of the current assets of the company have been financed by long term
financing. The company has followed conservative approach on financing of its
current assets as all fixed assets and more than 50% of current assets has been
financed by long term financing.

Total assets are increasing continuously making continuous increasing in current

assets except in fiscal year 2073/74. But operating income is in fluctuating trend.
The growth of current assets has not positive impact on operating income.
Correlation coefficient shows current assets are positive correlation with total
assets but negative correlation with operating income.

Receivable is effective as ACP is decreasing except fiscal year 2072/73 & 2073/74
its turnover is good. Cash is not effective as it has not good turnover ratio.

The profitability and liquidity position of the company is good but they are
negatively correlated. Trend indices shows increasing current assets and total
assets but current liability, net working capital and receivable are in fluctuating
trend.

The volume of death claim and the surrender are increasing trend during the five
year study period. But the ratio of both to total premium collection ration is in
fluctuating trend. High volume of death claim and surrender affect the growth of
the company so company conscious about it. Maturity and survival benefit (money
back policy only) is the nature of the life insurance business.

35
3.2 Conclusions

This research, after a long analysis process, concludes that the overall working
capital management of NLIC's is satisfactory level during the five years study
period. There is sufficient amount of current assets to meet the current obligation
of the company which is a sign of good liquidity position. The company has sound
liquidity position and there is no probability of technological insolvency. Almost
all of the variables of working capital are in increasing trend but the volume of
operating income (sale) is in decreasing & fluctuating trend. The corporation has
satisfactory level of profit but it has decreased in second fiscal year during the five
year study period and increasing trend than after. Being a service provider, it
doesn't need more fixed assets. So, a great proportion of total assets are current
assets. As it doesn't require more liquidity, a large portion of current assets is
investment. The company has effective working capital, good profitability &
sufficient current assets. Low portion of receivable in current assets and
decreasing level of ACP except fiscal year 2073/74 of NLIC indicates the good
working capital management of the company. Besides this, this study also
indicated some critical aspects of working capital management and has suggested
too. NLIC being a service provider, kept a large volume of working capital, which
indicates excess liquidity position. The trend of sales is fluctuating; it increased by
high level at second fiscal year and again decreased high level at fourth fiscal of
the five year study period. Average percentage of cash and bank balance is
19.34%. It is the second most important variable of current assets and it is
increasing every fiscal year. Large portion of long term fund is invested in current
assets where more than half of current assets are financed by long term sources.
Lastly, the research is concluded by emphasizing the control over investment in
current assets, applying cash management techniques to increase the portion of
cash on total assets.

36
 References
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Adhikari, Ganesh prasad (2002), Proposal of thesis writing, Ratna Pustak
Bhandar. Kathmandu.
Agrawal, N. K. (2004), Management of Working Capital, Sterling Publication Pvt.
Ltd. New Delhi.
Bhandari, Dilli Raj (2006), Principle and Practice of Banking and Insurance,
Aayush Publication. Kathmandu.
Brigham B. F. (2008), Financial Management (Theory and Practice), the Dryden
Press, Illinois.
Dangol, R.M. (2010), Management Accounting, Taleju Prakashan, Kathmandu.
Gidwani, S.J. (2012), Principles of Insurance, Insurance Institute of India,
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Gidwani, S.J. (2014), Life Assurance Finance, Insurance Institute of India,
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Websites
[Link]
[Link]

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