FINANCIAL STATEMENT ANALYSIS OF BULBULE

SAVINGS AND CREDIT CO-OPERATIVE LTD.

A Project Proposal

By
Jamuna Lamichhane Magar
Symbol No : 10940026
T.U. Regd. No.:7-2-1094-0037-2016
Siddhapaila Campus

Submitted To
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Birendranagar, Surkhet
2020

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 CHAPTER I

INTRODUCTION

1.1 Background

Financial statement analysis is the study of a company’s financial statements to

determine the past and future performance of the company. At this point, one should
be familiar with the three basic financial statements: The income statement, the
balance sheet and the statement of cash flows. Financial statements are important for a
number of reasons. Companies have to keep records to determine their tax
obligations. Internally, managers in the company might be interested in questioning
how efficiently the company is run and whether there might be some way to improve
that. External investors would also be interested in the financial condition of the
company. Someone who is interested in buying the company’s stock might want to
know how profitable a company is and how that might change in the future. A
company that is considering lending the company money to finance an expansion
would want to know if the company will be able to repay the loan in the future
(Dwight and Shelor, 1998).

One of the central questions for financial analysts is whether a firm is profitable.
There are a variety of ways of measuring profitability. The process of critical
evaluation of the financial information contained in the financial statements in order
to understand and make decisions regarding the operations of the firm is called
‘Financial Statement Analysis’. It is basically a study of relationship among various
financial facts and figures as given in a set of financial statements, and the
interpretation thereof to gain an insight into the profitability and operational
efficiency of the firm to assess its financial health and future prospects. The term
‘financial analysis’ includes both ‘analysis and interpretation’. The term analysis
means simplification of financial data by methodical classification given in the
financial statements. Interpretation means explaining the meaning and significance of
the data. These two are complimentary to each other. Analysis is useless without
interpretation, and interpretation without analysis is difficult or even impossible
(Islam, 2000).

Financial statement analysis is a judgemental process which aims to estimate current

and past financial positions and the results of the operation of an enterprise, with

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primary objective of determining the best possible estimates and predictions about the
future conditions. It essentially involves regrouping and analysis of information
provided by financial statements to establish relationships and throw light on the
points of strengths and weaknesses of a business enterprise, which can be useful in
decision-making involving comparison with other firms (cross sectional analysis) and
with firms’ own performance, over a time period (time series analysis) (Harris, 2001).

1.1.1 Cooperative

A cooperative is an autonomous association of persons who voluntarily cooperate for

their mutual, social, economic, and cultural benefit.. Cooperatives include non-profit
community organizations and businesses that are owned and managed by the people
who use its services (a consumer cooperative) or by the people who work there (a
worker cooperative) or by the people who live there (a housing cooperative).
Cooperation dates back as far as human beings have been organizing for mutual
benefit. Tribes were organized as cooperative structures, allocating jobs and resources
among each other, only trading with the external communities.
Cooperatives are established under following principles.
 The user ownership principle: Co -operative is owned by people who use it.
 The user control principle: Cooperative is controlled by people who use it.
 The user benefit principle: Benefit is distributed in proportionate among the
members of cooperatives.
 In agriculture, farmers’ cooperative is important and present in Nepal. Basically there
are following types of farmers’ cooperatives in Nepal.
Marketing Cooperatives
These include commodities or commodity groups such as cotton, dairy, fruit and
vegetables, poultry, and livestock marketing cooperatives. Marketing cooperatives’
primary objective is marketing the farm produce of its members. Most of the market
volume of this cooperative comes from the farm produce of its members. As
marketing is a very difficult task for farmers, establishing a marketing cooperative is
very important for commercialized agricultural development and to maintain the farm
profit.

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Farm Supply Cooperatives
Farm supply cooperatives are vital for the dependable supply of farm inputs such as
farm machinery, equipment, fertilizers, housing materials, livestock feed, seed, and
petroleum products. They may also handle items such as lawn equipment, food items,
or necessary items for gardening. Farm supply cooperatives may be established at the
local, regional, or the national level depending on the nature of farm supply needs.
Cooperative endeavors such as feed mills, farm machinery, and fertilizer plants can be
established at the regional or national level, whereas the farm supply depot can be
established at the local level.
Service Cooperatives
Service Cooperatives are set up for special services such as credit services,
telephone/electric service, insurance services, irrigation services, grain banks,
trucking, artificial insemination, cotton ginning, ginger drying, rice drying, etc.
Service Cooperatives may also provide items such as chemicals, diesel, oil, gas, feed,
seedlings, and seeds to its members. Soil testing, crop scouting, and land leveling are
other services a service cooperative may provide to its members.
Production Cooperatives
Farmer Cooperatives for agricultural production such as milk, fruits and vegetables,
poultry, etc., fall into this category. In a true sense, it appears that the French Worker
Cooperatives, which are based on the principle of collective entrepreneurship, are the
prime example of Production Cooperatives (Batille-Chedotel and Huntzinger, 2004).
Processing Cooperatives
Farmer cooperatives for processing agricultural commodities such as fruits,
vegetables, flowers, etc., are important to minimize losses from perishable
commodities and increase income from these commodities.
Research published by the World watch Institute found that in 2012 approximately
one billion people in 96 countries had become members of at least one cooperative.
The turnover of the largest three hundred cooperatives in the world reached $2.2
trillion – which, if they were to be a country, it would make them the seventh largest.
One dictionary defines a cooperative as "a jointly owned enterprise engaging in the
production or distribution of goods or the supplying of services, operated by its
members for their mutual benefit, typically organized by consumers or farmers".
Cooperative businesses are typically more economically resilient than many other
forms of enterprise, with twice the number of co-operatives (80%) surviving their first
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five years compared with other business ownership models (41%). Cooperatives
frequently have social goals which they aim to accomplish by investing a proportion
of trading profits back into their communities. As an example of this, in 2013, retail
co-operatives in the UK invested 6.9% of their pre-tax profits in the communities in
which they trade as compared with 2.4% for other rival supermarkets.
The International Co-operative Alliance was the first international association formed
(1895) by the cooperative movement. It includes the World Council of Credit Unions.
A second organization formed later in Germany: the International Raiffeisen Union.
In the United States, the National Cooperative Business Association (NCBA CLUSA;
the abbreviation of the organization retains the initials of its former name,
Cooperative League of the USA) serves as the sector's oldest national membership
association. It is dedicated to ensuring that cooperative businesses have the same
opportunities as other businesses operating in the country and that consumers have
access to cooperatives in the marketplace. A U.S. National Cooperative Bank formed
in the 1970s. By 2004 a new association focused on worker co-ops was founded, the
United States Federation of Worker Cooperatives.
Since 2002 cooperatives and credit unions could be distinguished on the Internet by
use of a .coop domain. Since 2014, following International Cooperative Alliance's
introduction of the Cooperative Marque, ICA cooperatives and WOCCU credit unions
can also be identified by a coop ethical consumerism label.

1.1.2 History of Cooperative in Nepal

Nepalese people have a long tradition in co-operation taking many forms of labour
sharing in villages, informal mutual aid groups and rotating savings and credit
associations. Agriculture is the mainstay of the Nepalese economy. It is the source of
livelihood of 80 to 90 % of the population, accounts for 53% of the GDP and is the
main contributor to export earnings. It is therefore logical that most of the co-
operatives in Nepal are related to agriculture, to farming and to farm products.
Subsistence farming is still widely spread. Land distribution is uneven. The overall
average size of operational land holding is slightly above one hectare. The small and
marginal farmers who constitute the majority, operate between 0.28 and 1.03 hectares.

Similarly, the top 5 percent of owners control about 40 percent of cultivated land
while the bottom 60 percent control about 20 percent. It is estimated that 10.4 percent

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of the households are landless; Terai constitutes the highest with 18.3 percent
followed by Mountain and Hills with 3.7 percent and 2.2 percent respectively.
However, another estimate based on holdings of cultivated lands by rural households
reveals that 19.01 percent are landless; 35.0 percent in Terai, 11.3 percent in
Mountains and 7.3 percent in the Hills. Limited availability of arable land makes off-
farm activities increasingly important. Although the country is rich in water resources,
its agriculture depends primarily on monsoon rains. Only 25 % of the total potential
area is covered by irrigation.

 Accordingly the main common problems that farmers are facing in Nepal and
which could possibly be solved by working together the co-operative way, are:

  Poor supply and frequent shortages of essential agricultural inputs,

 unreliable and insufficient supply of water,
 irregular and thinly distributed extension services,
 limited access to credit facilities,
 lack of markets and price guarantees for their produce and erratic provision of
minimum support price to the farmers and
 lack of insurance services for animals and crops.

Furthermore co-operatives would be the most appropriate organisation of farmers to

pool their resources, their demand and their produce and to represent their interests
vis-à-vis the government and commercial firms.
Modern co-operatives began in Nepal in 1954 when a Department of Co-operatives
(DOC) was established within the Ministry of Agriculture to promote and assist
development of co-operatives. The first co-operatives formed in Nepal were co-
operative credit societies with unlimited liability created in the Chitwan district as part
of a flood relief and resettlement programme. They had to be provisionally registered
under an Executive Order of HMG and were legally recognised after the first Co-
operative Societies Act of 1959 was enacted. The history of co-operatives in Nepal is
closely related to Government’s initiatives to use co-operatives as part of its
development programmes. Therefore, the development of co-operatives will be
described in eight phases corresponding to eight plan periods.
During the First Five-Year-Plan (1956/7-1960/1) Government embarked on an
ambitious programme to organise 4,500 agricultural multipurpose co-operatives.

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During the Second Three-Year-Plan (1962/63-1964/1965) a Land Reform Act came
into force in 1964 including a compulsory savings scheme, according to which
farmers had to save a portion of their crop.
During the Third Five-Year Plan (1965/66-1969/1970) the total number of co-
operatives reached 1,489 operating in 56 out of 75 districts.
During the Fourth Five-Year Plan (1970/71-1974/75) a massive reorganisation
programme launched already in 1969 was pursued, placing emphasis on the quality
rather than on the quantity of co-operatives.
Under the Fifth Five-Year Plan (1975/76-1979/80) a massive Co-operative Expansion
Programme was launched, the “Sajha Programme”.
During the Sixth Five-Year Plan (1980/81-1984/85) an “Intensive Sajha Programme”
was launched in 1981 focusing more on and made more responsive to the needs and
problems of small farmers.
During the Seventh Five-Year Plan (1985/86-1989/90) efforts were made to reshape
the co-operative movement.
It appears that until 1990 most cooperative ventures were limited to credit and finance
and were controlled by the government. The Cooperative Act of 1992 provided
freedom for the farmers themselves to organize and establish cooperative societies. As
of 2004, it is reported that a total of 7,598 cooperatives exist in Nepal, and of the total
2,979 were multipurpose cooperatives, 2,345 credit unions, 1,410 milk producer
cooperatives, 154 consumer cooperatives, and 710 other types of cooperatives (Mali,
2005). It is reported that consumer cooperatives are failing mainly due to the opening
of department stores nationwide. Cooperatives are also found in the areas of
transportation, vegetable production, coffee and tea production, wood carving,
furniture, the cottage industry, carpet industry, and  ginger  production.
Present status of cooperative in Nepal
            At present context, there are 3500000 shareholders of cooperative. There are
24000 primary cooperative, 15 central cooperative organizations and national
cooperative bank in the country. At national level, more than 200000 people are
engaged, out of which 80% are working on voluntary basis. Today we have
Agriculture cooperative central committee, Bee cooperative central committee,
Vegetable and fruits cooperative central committee, Sugar cooperative committee,
Coffee cooperative central committee, Dairy cooperative central committee, Seed
cooperative central committee, Medicinal plants central committee at national level.
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Including all, a total of 10 agriculture related cooperative central committees are
present.

 Benefits obtained from cooperative movement in Nepal

Through farmer cooperatives, important agricultural developmental objectives such as
enhancing agricultural production, adding value to agricultural produce, enhancing
marketing of agricultural commodities, and developing technologies and practices
related to agricultural production can be achieved. Farmers will derive income from
multiple sources including production and marketing co-ops, value-added
commodities, and trade. Trade profits will go directly to the farming communities
rather than to a few intermediaries in the cities. The bargaining power of farmers will
increase and they can get good market as well as good price for their products.
Moreover, because of low market margin, consumers will get the products at lower
price and hence efficient mobilization of product will be done. Due to the
decentralized grassroots level of production, marketing, and processing of agro-
commodities in the cooperative mode of nation building, farmers and the rural
population will feel that villages and rural areas are as good as cities for living. This
will help to stop rural to urban migration. Governmental subsidies and support
systems will directly help rural communities and the rural infrastructural
development. People will generate income through various sources including farmer
cooperatives, employment at farmer cooperatives, and other agricultural production
activities. Through the formation of farmer cooperatives across the nation, farmers,
ethnic groups, women, rural youth, and the suppressed classes will feel that they are
part of nation building and are sharing in the fruits of economic growth. It will bring
them a sense of pride and dignity. Similarly, to cope with the natural misfortune like
drought, flood, landslides etc and search alternatives for them, collective effort
through cooperative is necessary in our context. The average landholding of a farmer
in Nepal is less than 1ha, by collective farming, mass production in commercial scale
is possible for the commodity desired. The ultimate benefit is food security for the
farmers and good income through agriculture.
Problems in cooperatives in Nepal
Although the benefits that could be obtained from cooperatives are numerous, yet the
development of cooperatives is not satisfactory in Nepal. Government has declared
cooperative as one of the three pillars of Nepalese economy and interim constitution

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has focused on same, but practically, implementation as per the declaration is weak
and the speed of development need to be accelerated but yet it is not done. Even
though governmental agencies, international institutions, Non-Governmental
Organizations, and other stakeholders have put some effort into the cooperative
movement in Nepal, the results are far from satisfactory. There is no remarkable
progress in major cereal crops production. About 1760 dairy cooperative are
established primarily but both liquid and powdered milk needs to be imported. The
reasons behind the unsatisfactory development of cooperatives in Nepal could
possibly be the following;
i. Most profitable cooperatives are urban-based, and except for finance, credit, and
dairy cooperatives, the rural sector has not felt the presence of the cooperative
movement in the country.
ii. Cooperative movements have to strive for the inclusion of women, dalits, poor
people, and other oppressed classes of society. Lack of inclusion of every sector for
the cooperative movement is a cause for its unsuccess.
iii. Lack of clarity about mission, national vision and adequate monitoring on the part
of government with respect to cooperative movement
iv. Lack of managerial skills and professionalism, sound planning and implementation
v. Lack of working capital, appropriate research, extension and education about
cooperative movement
vii. Lack of technological support and development
viii. Lack of creditability.
PROMOTION OF COOPERATIVES
To lend full support to the cooperative movement, governmental agencies must be
able to provide full research support for farmer cooperatives on various issues
including agriculture and food, plants and plant products, biotechnology, business,
natural resources conservation, engineering, animals, processing, pest management,
cropping systems, and economics. Building partnerships, strategic planning, record
keeping, accountability, and policy dialogues are other areas where appropriate
venues at the central, regional, and local levels for farmer cooperatives must be
ensured. Initiatives should be taken for scientific land reform and land policies
formulation. Land reform policies should be formulated considering the economies of
scale, land productivity, land use types, and geography. Special attention should be
given to Scientific land policies are critical for the overall agricultural development of
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the country. In Nepal, immediate the implementation of land reform policies. A
farmer cooperative will not be successful without having land rights.
Appropriate governmental policies and programs, rules and regulations, credit
availability, insurance policies, and governmental support systems should be in place
for a successful farmer cooperative movement

1.2 Profile of Bulbule Savings and Credit Co-operative Limited (BSCCL)

Bulbule Savings and Credit Cooperative Limited (BSCCL) is a savings and credit co-
operative organization in Birendranagar, Surkhet, one of the largest economy in the
Mid-western Region of Nepal. It is an institutional cooperative organization,
composed of the staff and the people all over Birendranagar, Surkhet. The cooperative
is licensed and regulated under Nepal Cooperative Act.

The BSCCL was established with the objective of mobilizing savings from its
members and providing loans to members, using those resources. Categorically its
organizational values are gender equity, social empowerment, enhancement of
people’s capability, democratic system, self-reliance, social justice, human rights,
faith, participatory transparency and good governance and faith on equal opportunity
to all with no discrimination on any ground. In the last few years, it has been working
various sectors. It provides loan to its members by organizing saving and credit
programme. It has established its recognition in the local community with its
commitment and deeds rather than words.

1.3 Objectives
The main objective of the study is to analyze the financial statements of Bulbule
Savings and Credit Co-operative Limited (BSCCL). The specific objectives of this
study are as follows:

i. To assess the current profitability and operational efficiency of BSCCL.

ii. To ascertain the importance of different components of the financial position of

BSCCL.

1.4 Rationale
Analysis of financial performance of any company or organization gives insight into
their financial condition and performance. This study will provide guideline for
improving the performance to achieve the overall objectives. Similarly, this study will
be rational to identify the hidden weakness regarding financial administration of

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BSCCL. This study will be significantly beneficial for those who wish to carry out
such studies.

1.5 Literature Review

The evaluation of Financial Position has greatly affected the role and important of
Financial Position of any organization. Nowadays, deposit is based characterized as
ever changing with new ideas and techniques. Only efficient manager of the company
can achieve the set up goals. If a company does not maintain adequate equity capital,
it makes the company more risky. If a company has inadequate equity capital, it must
use more debt that has high fixed cost. So, any firm must have adequate equity capital
in its capital structure. To measure the performance of any organization in many
aspects, its financial indicator with the help of financial statement should first be
analyzed. Financial analysis is the process to identify the financial strength and
weakness of the concerned organization. It is the process of finding detailed
accounting information given in the financial statement (Raab, 2003).

Financial Statement is generally explained as financial information which is the

information relating to financial position of any firm in a capsule form. Financial
Statement Analysis is a method used by interested parties such as investors, creditors,
and management to evaluate the past, current, and projected conditions and
performance of the firm. Ratio analysis is the most common form of financial
analysis. It provides relative measures of the firm's conditions and performance.
Horizontal Analysis and Vertical Analysis are also popular forms. Horizontal analysis
is used to evaluate the trend in the accounts over the years, while vertical analysis,
also called a Common Size Financial Statement discloses the internal structure of the
firm. It indicates the existing relationship between sales and each income statement
account. It shows the mix of assets that produce income and the mix of the sources of
capital, whether by current or long term debt or by equity funding. When using the
financial ratios, a financial analyst makes two types of comparisons (Gautam, 2005).

The basis of financial planning analysis and decision making is the financial
information (Statements). Financial statements are needed to predict, compare and
evaluate a firm’s earning ability. It is also required to aid in economic decision
making investment and financing decision making. The financial information of an
enterprise is contained in the financial statements. The use of financial statement

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analysis in investment decision has been addressed by a series of authors. profitability
is the ability of an entity to earn income. It can be assessed by computing various
relevant measures including the ratio of net sales to assets, the rate earned on total
assets, etc. (Pandey, 2005).

Rao and Reddy (2005) in their study entitled “Financial Performance in Paper
Industry- A Case Study” stated that the financial position of the company had been
improving from year to year. The company's performance in relation to generating
internal funds in the form of reserves and surplus was excellent and also was doing
well in mobilizing outside funds. The liquidity position of the company was sound as
it was revealed by current and liquid ratios which were above the standard. The
solvency ratios showed that the company had been following the policy of low capital
gearing from 2003-2004 as these ratios had been decreasing from this year. The
performance of the company in relation to its profitability was not up to the expected
level. The company's ability to utilize assets for generation of sales had not been
improved much during the study period as it was revealed by its turnover ratios.

Memon and Tahir (2012) in their study entitled “Performance Analysis of

Manufacturing Companies in Pakistan” stated that the main objective is to examine
the performance of fourteen manufacturing companies in Pakistan using financial
accounting ratios. The study suggested as ENGRO being the largest company by total
assets over three years (2006, 2007, 2008) spent more, making low sales, having less
PBT and ROA than the other thirteen smaller companies: FCC being second largest
company by assets it shows high sales, high PBT and ROA during the five year
period. On the other hand, NRL being the fourth largest company by total assets
shows highest sales in five years, lowest expenditures in 2010 as compared to other
thirteen listed companies but it has decreasing PBT and ROA during the period under
investigation. Finally, they concluded that in highlighted companies incurred higher
expenses as a result of Expense Preference Behavior Theory and low productivity
growth.

Rao et al. (2013) in their study entitled “An Empirical Analysis on Financial
Performance of Public Sector Housing Corporation in India: A Case Study of
HUDCO”, stated that the main concept of their study is Profitability and liquidity
management is of crucial importance in financial management decision. The most
favourable financial performance could be achieved by a company that can trade off

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between profitability and liquidity performance indicators. The purpose of this study
is to find out the financial position of and know the significance of them. Descriptive
statistics discloses that performance of the selected unit in terms of liquidity, solvency
and profitability position is very satisfactory and relatively efficient financial position
is found in all the cases. They suggested that both the institutions under the study
should concentrate on financial profitability, especially unexplained variables in
purpose of creating shareholders' wealth.

1.6 Methods
1.6.1 Research Design

A research design is a framework or blueprint that plans the action for the research
project. This study was analytical and descriptive design in which information was
elicited from different annual reports of BSCCL.

1.6.2 Population and Sample

A number of co-operative organizations are operating in Birendranagar, Surkhet. All

these cooperative organizations were the population of this study. Among these
organizations, Bulbule Savings and Credit Co-operative Limited was selected
purposively as sample for this study.

1.6.3 Nature and Source of Data

This study totally depended on secondary data which was obtained from the annual
reports of BSCCL. The nature of the data in the study was both quantitative and
qualitative. The sources of data was secondary. Secondary data was collected from
annual reports, different books, websites, etc.

1.6.4 Data Collection Procedure

For this study, BSCCL was selected. The data was collected from annual reports of
BSCCL.

1.6.5 Presentation of Data

The collected data was edited, classified and tabulated for data organization. The
quantitative data was presented in tabular form and suitable statistical tools like
numericals and percentage was used for data analysis. Pie-chart and bar-diagrams
were used to present the data as well.

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1.6.6 Data Collection Tools and Techniques

The most commonly used techniques of financial analysis were balance sheet and
statement of profit and loss, ratio analysis and cash-flow analysis which were used in
this study to analyze the financial statements of BSCCL.

1.7 Limitations
Due to limited time and budget constraints, this study was limited within the
followings:

i. The sample consisted of Bulbule Savings and Credit Co-operative Limited

(BSCCL).

ii. The study was confined within annual reports of BSCCL.

iii. The report was limited within the data of last five fiscal years.

iv. Generalizability of the results of the study was problematic as the study was
conducted in only one organization.

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