1

CASH FLOW SMOOTHING AND IDENTIFICATION OF INVESTMENT

ALTERNATIVES

FOR ABC LIFE INSURANCE COMPANY LIMITED

Business Research Project Report

Submitted to

Kathmandu University School of Management

In partial fulfillment of the requirements for the

Master of Business Administration (MBA)

By

Salim Lal Awale

KU Registration No: 021571-17

Roll No: 17302, MBA Spring 2017

Under the supervision of

Dipesh Karki

Assistant Professor, Economics

February, 2019

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DECLARATION

I hereby declare that the report entitled “Cash flow smoothing and

identification of investment alternatives for ABC Life Insurance Company Limited” is

my original work and has not been submitted to any other institution before. The

report has been prepared for the partial fulfillment of Masters of Business

Administration in sixth trimester as prescribed by the Kathmandu University School

of Management.

………………

Salim Lal Awale

Rolle No: 17302

MBA Spring 2017

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ACKNOWLEDGEMENT

This report entitled “Cash flow smoothing and identification of investment

alternatives for ABC Life Insurance Company Limited” has been prepared for the

partial requirement of Masters in Business Administration (MBA), Kathmandu

University.

This work was made possible due to contribution of many people. I would

like to express my gratitude to all of them. I would like to thank my supervisor Mr.

Dipesh Karki for all the help and guidance for the research. I would like to express

gratitude to Mrs. Sabina Baniya Chhetri, Head of Research Unit and faculties

associated with the University.

I sincerely thank Mr. Rajesh Dhakal, Mr. Shankar Chalise and Mr. Resham

Aryal for their guidance and encouragement in carrying out the report. I also wish to

express my gratitude to the officials and staff members of ABC Life Insurance

Company LTD who rendered their help in the process of the research report.

Last but not least, I would like to express my warm respect and gratitude to all who

have directly or indirectly helped me with their kind assistance and encouragement

without their help this report would not have been possible. Despite of sincere efforts

made, the chance of human error cannot be neglected. Therefore, I would like to take

responsibility of any kind of deficiency presented in the report work.

Salim Lal Awale

Roll No: 17302

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EXECUTIVE SUMMARY

ABC Life Insurance Company is one of the new life insurance company in

Nepal. It started its operation on October 19, 2017 after obtaining operating license

from the Beema Samiti, the Insurance Regulatory Authority of Nepal. The company

aims to be the most reliable insurance company in the country by providing various

insurance policies to cover financial risk of the policy holders. It provides financial

security to the policy holders of all ages by providing innovative insurance plans.

Cash flow smoothing is the process of streamlining the uneven cash flow of the

company. There may be various reasons for not being able to receive cash in time.

Specially in insurance business in Nepal, the branch managers of ABC Life Insurance

Company have failed to deposit the cash receipt in time. Resulting to delay the

available cash in time has caused significant problems to the head office as cash could

not be effectively mobilized despite having sufficient cash in hand. The report

describes about the different ways other companies are managing their cash

effectively through cash flow smoothing and the things ABC Life Insurance must

perform for its efficiency.

Additionally, most of the investment of ABC Life Insurance Company is in

fixed deposit of commercial bank. The investment guideline provided by the

insurance board has clearly stated minimum 75% of investment has to be in fixed

deposit of commercial bank and government securities since it is a safe investment.

So, remaining 25% can be invested in other sectors such as ordinary share, promote

share and in national priority projects. The report explores the alternatives of

investment in order to diversify the investment and get maximum return from it.

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TABLE OF CONTENTS

DECLARATION ........................................................................................................... 2

ACKNOWLEDGEMENT ............................................................................................. 3

EXECUTIVE SUMMARY ........................................................................................... 4

LIST OF TABLE AND FIGURES ................................................................................ 8

LIST OF ACRONYMS ................................................................................................. 9

CHAPTER I ................................................................................................................. 11

INTRODUCTION ....................................................................................................... 11

1.1 Background of the project ............................................................................. 11

1.2 Problem statement ......................................................................................... 13

1.3 Objectives of the project ............................................................................... 14

1.4 Scope and limitations of project .................................................................... 14

CHAPTER II ................................................................................................................ 16

LITERATURE REVIEW ............................................................................................ 16

CHAPTER III .............................................................................................................. 18

METHODOLOGY ...................................................................................................... 18

3. 1 Introduction ................................................................................................... 18

3. 2 Research Design ............................................................................................ 18

3. 2. 1 Purpose of the study ............................................................................... 18

3. 2. 2 Extent of researcher interference ........................................................... 18

3. 2. 3 Study Setting .......................................................................................... 19

3. 2. 4 Unit of Analysis ..................................................................................... 19

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3. 2. 5 Time horizon .......................................................................................... 19

3. 3 Population and sample .................................................................................. 19

3. 3. 1 Population of the study .......................................................................... 19

3. 3. 3 Sampling method ................................................................................... 20

3. 4 Nature and sources of data ............................................................................ 20

3. 5 Data Analysis ................................................................................................ 20

CHAPTER IV .............................................................................................................. 22

RESULTS .................................................................................................................... 22

4. 1 Reasons for delay in cash deposit ................................................................. 23

4. 2 Cash receipt and deposit interval .................................................................. 23

4. 3 Investment alternative identification ............................................................. 24

4. 3. 1 Fixed deposit gain .................................................................................. 24

4. 3. 2 Dividend yield gain ................................................................................ 25

4. 3. 3 Earning yield gain calculation ............................................................... 26

4. 3. 4 Value at Risk (VAR) from stock investment ......................................... 27

4. 4 Selection of investment alternative ............................................................... 30

4. 5 Creation of portfolio ...................................................................................... 31

CHAPTER V ............................................................................................................... 33

SUMMARY, SUGGESTIONS PROPOSED CHANGE PROGRAMS AND ACTION

...................................................................................................................................... 33

5. 1 Summary and benefits from cash flow smoothing and portfolio

diversification .......................................................................................................... 33

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5. 2 Implementation plan for cash flow smoothing .............................................. 33

5. 3 Implementation plan for portfolio diversification ......................................... 34

5. 4 Conclusion ..................................................................................................... 35

REFERENCES ............................................................................................................ 36

ANNEXES ................................................................................................................... 37

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LIST OF TABLE AND FIGURES

Table 1: Branches with delay deposit with average transaction size and delay days .. 23

Table 2: Fixed deposit gain calculation ...................................................................... 25

Table 3: Dividend yield of stocks from NEPSE .......................................................... 26

Table 4: Earning yield of stocks from NEPSE ............................................................ 27

Table 5: Value at risk (VAR) Historical simulation method ....................................... 28

Table 6: Value at risk (VAR) Variance Co-Variance Method .................................... 29

Table 7: Investment portfolio return ............................................................................ 31

Table 8: Daily Cash movement reporting format ........................................................ 34

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LIST OF ACRONYMS

SEBON: Security Exchange Board of Nepal

NEPSE: Nepal Stock Exchange

IB: Insurance Board

CIT: Citizen Investment Trust

BFI: Banking and Financial Institutions

EPS: Earnings Per Share

DPS: Dividend Per Share

VAR: Value at Risk

SBBLJ : Sahayogi Vikas Bank Limited

NGPL: Ngadi Group Power Limited

KBBL : Kailash Bikas Bank Limited

GDBL: Gandaki Bikas Bank Limited

NTC: Nepal Telecom Corporation

PFL: Pokhara Finance Limited

EDBL: Excel Development Bank Limited

CFCL: Central Finance Limited

JBBL: Jyoti Bikash Bank Limited

KNBL: Kankai Bikas Bank Limited

NMB: NMB Bank Limited

NBL: Nepal Bank Limited

PRVU: Prabhu Bank Limited

CZBIL: Citizen Bank International Limited

PCBL: Prime Commercial Bank Limited

JBNL: Janata Bank Nepal Limited

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NICA: NIC Asia Bank

MBL: Machhapuchchhre Bank Limited

ADBL: Agricultural Development Bank Limited

KBL: Kumari Bank Limited

MEGA: Mega Bank Limited

NIBPO: Nepal Investment Bank Promoter Share

NABILPO: Nabil Bank Limited Promoter Share

BPCL: Butwal Power Company Limited

NMBSF1: NMB Sulav Fund 1

SEOS: Siddhartha Equity Oriented Scheme

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CHAPTER I

INTRODUCTION

1.1 Background of the project

The major source of cash inflow to the life insurance company is the premium

collection. And for this, companies have been establishing branches in different parts

of the country in order to collect as much premium as possible. Unlike other financial

institutions the cost of opening a new branch is relatively cheaper for insurance

company. The number of employee is lower in branches and they mainly collect

premium from insurance agents who are always on the field. One of the major

problem the company is facing is not actually the premium collection from insurance

holder but the collection of cash from the branches. The branch managers and field

agents collect premium on a daily basis but instead of depositing in company’s name

they hold on to the cash in their own bank account for their short term gain from

interest or for personal use. It has been a major issue for the company as they are not

able to collect their own money in time and make investment. Furthermore, it is

hurting the company more as the daily collection report shows increase in cash

balance but most of them are within branches so company has much less working

capital in reality than the management believes to be. Management seems to have

failed to check the daily bank balance as according to the collection of premium.

As per the guideline provided by the Insurance Board of Nepal all the insurance

company must invest minimum of 35% of their total investment in fixed deposit of

“A” class commercial bank of the country and 25% in government securities. Given

the scarcity of government securities all the life insurance company must hold

minimum of 70% of their total investment in fixed deposit of commercial bank. It

may include maximum of 15% investment in deposit of development bank and

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maximum of 5% of investment in citizen investment trust. With this regard life

insurance company can deposit as much money on fixed deposit as they with. Due to

liquidity crunch in our country Commercial banks have been providing lucrative

interest rate on fixed deposit ranging from 10% to 13% with monthly interest

payments.

ABC life insurance company is also facing the similar condition of late cash

deposit by its branches resulting in lower working capital and loss in investment

opportunity. Branches are found to be holding as much as Rs. 13 Lakh to 15 Lakh in

their own account and rolling the company’s cash for their own benefit. In order to

curb this problem various step needs to be taken by top management in order to

discourage the branch staffs from holding cash and working for the best interest of the

company. ABC life insurance company is one among the 10 life insurance company

which got permits for operation in May 2017. Despite being a new company

providing life insurance in Nepal it is one of the fastest growing company among the

10 life insurance company licensed in 2017. The capital structure of the company is

70:30 i. e. 70% is owned by the promoters of the company and 30% will be issued to

the public after getting the approval from Insurance board and Securities Exchange

Board of Nepal (SEBON). The company provides various life insurance product

under the endowment plan, money back plan, whole life insurance plan and term life

insurance plan.

In order to solve the issue relating to late cash collection the cash collection

process of older life insurance company can be considered and new technology can be

implemented in order to speed up the process. The increased daily cash flow will not

only smooth out the working capital of the company but also help make investment in

various sectors as prescribed in investment guideline.

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1.2 Problem statement

As the company is not able to collect cash from its branches in time the

company is having hard time managing its working capital and at the same time

losing a lot of investment opportunities. The study is mainly based on ways to speed

up the collection process and the extra investment gains that the company can achieve

from smoothing the cash flows from its branches. To achieve this goal few of the

branches of the company of the company is taken into consideration. The date of

collection of premium is recorded in the software (isolution) whenever a premium is

issued to the insurance holder and then the date of deposit of the same cash is tallied

with the deposit of the premium amount sent by branches on a daily basis. The

company accepts delay of deposit by only 1 day. So, whenever the collection date

and deposit date is varied by more than 2 or more days without valid reason the

amount of collection is taken into consideration for its opportunity cost. The

investment opportunities will be based on the investment guideline provided by the

insurance board. By using appropriate technology in cash collection the company

may be able to collect cash within the same day of receipt by the branch agents.

Moreover, because of liquidity crisis since the establishment of ABC life insurance

company in 2017 the secondary market has not performed well this has favored

management to invest in fixed deposit of commercial banks. In later part of the report

we will try to find out the possible return rate from investment in ordinary share,

promoter share and Citizen Investment Trust schemes as prescribed by Insurance

board in investment guideline.

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1.3 Objectives of the project

The main objective of the report is to find out possible solutions for expediting the

process of cash collection from branches and make investment in a portfolio rather

than investment in only fixed deposit in commercial banks. Furthermore, it will help

the company to manage its working capital necessary for day to day activity. The

smoothening of cash flow will help decrease the branch risk for the company as well.

Because of huge closing balance on branch side they may not be able to deposit the

collected amount and may declare themselves insolvent. So, in such cases for the

safety of premium collection by the branch, timely branch reconciliation must be done

and branch insurance can be taken from other non-life insurance companies. The

specific objectives of the research report are as follows:

i. Expediting the process of cash collection from its branches

ii. Smoothening the cash inflow of the company

iii. Improve the working capital of company by maintaining necessary balance

iv. Insurance of branches for the collection of premium

v. Timely branch reconciliation for reducing cash balance in the branches

vi. Identification of investment alternative to maximize return

vii. Portfolio formation containing investment in diverse sectors

viii. Find out incremental earning from the current business size and volume

1.4 Scope and limitations of project

The scope of the project may be applied to any insurance company facing the

same or similar problem. As the investment in fixed deposit is much safer

management often prefers not to invest in other sectors and it is much applicable for

other financial institutions as well. When we look at the portfolio of other insurance

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companies from their annual report we can find that almost 90% or more is fixed

deposit. So, a part of this report finding may be helpful for other companies as well to

diversify the investment.

The major limitation for the project is definitely the data collection. Since, the

problem is of financial nature companies don’t want to reveal their financial data and

they certainly don’t want the company problems to be published in any paper. It is

considerable since the competitors may take advantage of the problem if it is made

public. However, I find myself lucky to have found a company which is willing to let

me work on the major financial issue of the company and at the same time work on

ways to solve the issue. Since, the research is based on specific firms in the industry

there is not much previous reports available. It may be due to the fact that western

companies are better equipped with the technology and such issue is less prevailing it

in the western countries.

1. 5 Organization of the project report

This research report consists of five chapters each detailing the insights of the

research. The first chapter includes the background and introduction of the report.

Second chapter is the previous findings of the report and the literature review of the

report. The third chapter includes the methodology used in the research process.

Fourth chapter includes the descriptive analysis of the topic. Lastly chapter five

includes the research findings and implications of the study.

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CHAPTER II

LITERATURE REVIEW

Cash flow is the amount of cash and cash equivalent which the company

receives and makes payment to its creditors ("Cash Flow - What is Cash Flow ? Cash

Flow meaning, Cash Flow definition - The Economic Times", 2019). The higher the

fluctuations in the cash flow, higher is the risk for the company. Cash flow

management is the process of tracking the amount of inflow of outflow of the

company to know the available sum of money in future ("| Xero", 2019).

Warren Buffet says “It is not easy to predict future cash-flows and this is why

I stick to investments in companies that are consistent, well managed, and simple to

understand. A company that is hard to understand or that changes frequently does not

allow for easy prediction of future earnings and outgoings”. As popular investors like

Warren Buffett prefers stocks with stable performance so does managers when it

comes to income generation. It may be necessary for managers to smooth cash-flows

for risk management in the company. Rountree, Weston and Allayannis (2008)

proposes that smooth performance increases the value of the firm.

“Real-world cash flows are neither completely certain, uniform, and

continuous nor are they completely unpredictable (Stone, 1972). ” According to Stone

the day to day cash flow are generally independent and most firms can and do forecast

their cash flows, but there is always an element of uncertainty in forecast. Hence, the

firm’s net daily cash flow is lumpy, discontinuous, and partially known and partially

unknown.

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Portfolio management is the creation and updating of investment made in

various stocks, debentures, bonds, fixed deposits and other instruments available for

the company. Insurance Board in our country Nepal has provided insurance

companies to follow a specific guideline so that the policy holders premium will not

be risked in investment decisions of the company. Portfolio can be viewed as

dynamic activity through which a company invests in different resources to achieve

strategic objectives (Institue, 2017). Investment in portfolio is necessary in order to

reduce the risk that prevail in the certain industry.

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CHAPTER III

METHODOLOGY

3. 1 Introduction

This chapter consists of methodology used for the research classified into

three different section namely research design, data collection and data analysis.

3. 2 Research Design

It is the outline of how the study took place. It includes details of how data

was collected, what instruments are used in the research process and how the

instruments are used and intended meaning of data analysis.

3. 2. 1 Purpose of the study

This is an interventional research. The research has been conducted to know

the investment alternative to ABC life insurance company by investing in various

assets. The investment guideline provided by Insurance Board will be followed to

determine investment ratio in different sector. The company has parked most of its

investment in fixed deposit so we will reduce the fixed deposit to 70% of investment

which is the least amount a life insurance company must deposit in the sector. Rest of

the investment will be tested in Non-convertible promoter share maximum 10%,

ordinary share of public company maximum 10%, productive sector ordinary share

maximum 5%, share of investment company maximum 2% of total investment.

3. 2. 2 Extent of researcher interference

In this research various financial tools will be used to determine the

investment value of the company. Primarily financial ratios including dividend yield,

earning yield, earning per share and Value at risk (VAR) technique will be used to

compare the profit from different alternatives. Since, the stock data is taken from the

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stock market itself there is little to no chance of data manipulation. The investment

value of the company is taken from company software (isolution) and it has not been

modified or changed.

3. 2. 3 Study Setting

The data is derived from stock market and premium collection from company

itself. Since, we are taking past data for research purpose so the study setting is

contrived or back testing of data.

3. 2. 4 Unit of Analysis

The research helps ABC life insurance company to identify the different

investment alternative with maximum profit so the unit of analysis is the organization.

3. 2. 5 Time horizon

This is a cross sectional study as the investment alternative is evaluated at a

single point of time.

3. 3 Population and sample

3. 3. 1 Population of the study

The investment decision of the company affects all the aspects of the

company. The main cash inflow stream is from all branches of the company. So, the

population of the study is the cash flow stream from all 55 branches of the company.

3. 3. 2 Sampling frame

Five branches with the highest closing balance in hand is taken from total 55

branches. It will help to determine the branches which are not effectively managed

and through change can bring incremental cash flow to the organization.

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3. 3. 3 Sampling method

Judgmental sampling method is used for sampling purpose. Not all the

branches have sufficient premium collection and most of them do not make

significant impact on the study. So, expert opinion based on transaction size is used

for sampling purpose.

3. 3. 4 Sample size

The company presently has 55 branches and among them about 25 of them

only have regular big transactions. We are excluding the new branches with less

frequent transaction. Also not all of the branches do underwriting some of the

branches rely on other nearest branch. Out of 50 main branches we have selected 5

branch who have frequently failed to deposit cash collection in time. So, the sample

covers around 10% of the total population.

3. 4 Nature and sources of data

The data used in this research is taken from the software of the company itself.

So, only secondary data is used. Moreover, to know the market return also secondary

data is used since it is more reliable than primary data.

3. 5 Data Analysis

In order to smoothen the cash flow of the company from branches use of

internet technology may to used. The data obtained from the branches will be then

used to determine the investment alternatives for the company. The bank interest rate

on fixed deposit will be compared against the return from the return from secondary

market. The ratio of investment in different companies will follow the guideline

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provided by Insurance Board. The return from fixed deposit and return from market

is compared to make decision regarding investment alternative in future.

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CHAPTER IV

RESULTS

First of all, we calculate the value of investment on the same day when it was

collected. We exclude the collection amount that was deposited within next day of

receipt since it is within the policy of the company. For the investment purpose we

take different option ranging from investment in fixed deposit, non-convertible

preference share, ordinary share, and share of investment companies.

Insurance Board (IB) has clearly prescribed the sectors in which investment

can be made by life insurance company. The company must invest minimum 25% of

its total investment in government securities. However, if the government securities

are not available the said amount can be invested in fixed deposit. Minimum 35R of

total investment must be made in fixed deposit and short term deposit of “A” class

commercial bank. Maximum 15% of total investment can be invested in fixed deposit

of development bank. Maximum 5% of total investment can be invested in

investment schemes provided by Citizen Investment Trust (CIT). Minimum 75% of

investment must be invested in above mentioned sectors. The investments in these

sectors have less risk so ABC Life Insurance company has invested most of its

investment in these sectors. However, there are other investment alternatives as well.

Life insurance company can invest in other sectors as well and stay within the

investment guidelines.

ABC Life Insurance can invest maximum 10% of total investment in non-

convertible promoter share of commercial bank, development bank and finance

companies, maximum 10% in ordinary share of public companies, maximum 5% in

productive sector and maximum 2% in investment companies.

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The study aims to discover the reason for delay in deposit by the branches of

the company and identity the investment alternatives available to diversify the

investment of ABC Life Insurance Company.

4. 1 Reasons for delay in cash deposit

The findings from the research shows that the reason for delay in deposit is

mainly due to following reasons:

• Lack of staffs in the branches

• Unavailability of banks near branch offices

• Short term gains by branch staffs through cash rolling

• Personal gain from bank interest

• Lack of proper control from head office

4. 2 Cash receipt and deposit interval

Table 1: Branches with delay deposit with average transaction size and delay days

Branch

Number of delayed deposit from

September to December 2018

Average

transaction size

Average Delay

days

Baneshwor 23 Rs. 47,728 5.61

Butwal 104 Rs. 36,031 14.18

Chabahil 34 Rs. 32,928 18.76

Lahan &

Phidim 59 Rs. 68,747 18.00

Narayangadh 39 Rs. 77,692 7.66

The table shows the five branches of ABC Life Insurance Companies with

delay in cash deposit by more than two days in last four month of research study from

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September 2018 through December 2018. Baneshwor branch has delayed deposit of

23 transactions in last four months with average transaction size of Rs. 47,728 and

average number of days delayed is 5.61 days. Butwal branch has delayed deposit of

104 transactions in last four months with average transaction size of Rs. 36,031 and

average number of days delayed is 14.18 days. Chabahil branch has delayed deposit

of 34 transactions in last four months with average transaction size of Rs. 32,928 and

average number of days delayed is 18.76 days. Lahan & Phidim branch has delayed

deposit of 59 transactions in last four months with average transaction size of Rs.

68,747 and average number of days delayed is 18 days. And Narayangadh branch has

delayed deposit of 39 transactions in last four months with average transaction size of

Rs. 77,692 and average number of days delayed is 7.66 days.

If proper implementation of cash collection mechanism the delay in cash

collection can be reduced and the collected amount will help company generate extra

income from early investment.

4. 3 Investment alternative identification

A total of 153 stocks listed in Nepal Stock Exchange (NEPSE) were identified

on order to made investment in the most profitable companies. The listed companies

included Ordinary share of public companies, Promoter share of Banking and

Financial Institutions (BFI), mutual funds etc. Among the available investment

alternative only those companies with higher dividend yield and higher earnings per

share and earning yield were chosen for further analysis.

4. 3. 1 Fixed deposit gain

Most of the fixed deposit provided by commercial bank at the end of 2018 is

nearly 9% ("What is the interest rate offered by commercial banks after NBA calls

25

end of gentleman’s agreement?", 2018). So, for the calculation of gain from early

collection of cash be calculated by taking 9% annual interest rate as follows:

Table 2: Fixed deposit gain calculation

Branch

Number of delayed

deposit from September

to December 2018

Average

transaction

size

Average

Delay

Days

Interest at

9% FD

Baneshwor 23

47,728. 00 5.61

1,518.50

Butwal 104

36,031. 00 14.18

13,101.94

Chabahil 34

32,928. 00 18.76

5,178.77

Lahan &

Phidim 59

68,747. 00 18

18,002.30

Narayangadh 39

77,692. 00 7.66

5,722.94

Total

43,524.44

From the chosen sample of five branches among 50 branches a total of Rs.

43,524.44 is the extra income if the cash is invested in fixed deposit of commercial

bank.

4. 3. 2 Dividend yield gain

Dividend yield is the rate of return provided by the stock when it is purchased

from the secondary market. It is expressed as a percentage of current share price. A

total of 96 stocks were selected among the 153 available in NEPSE and dividend yield

was calculated to know the companies with the most dividend yield for investment.

The list of available stocks with the most dividend yield are as follows:

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Table 3: Dividend yield of stocks from NEPSE

Symbol Company Name

Cash

Dividend

Closing

Price

Dividend

Yield

SBBLJ Sahayogi Vikas Bank Limited 17 204

8.33%

NGPL Ngadi Group Power Limited 10 126

7.94%

KBBL Kailash Bikas Bank Limited 17 236

7.20%

GDBL Gandaki Bikas Bank Limited 14.2 198

7.17%

NTC

Nepal Doorsanchar Company

Limited 55 773

7.12%

PFL Pokhara Finance Limited 8.684 134

6.48%

EDBL Excel Development Bank Limited 17 266

6.39%

CFCL Central Finance Limited 7 110

6.36%

JBBL Jyoti Bikash Bank Limited 8.4 135

6.22%

KNBL Kankai Bikas Bank Limited 6.5 120

5.42%

NMB NMB Bank Limited 20 370

5.41%

As we can see even the company with the highest dividend yield provides less

return than the fixed deposit in commercial banks. It may be the reason why

institutional investors like ABC Life Insurance company choose to deposit in bank

instead of investment in stocks.

4. 3. 3 Earning yield gain calculation

Earnings per share (EPS) is the portion of company’s profit that is allocated to

each common stock. It serves as an indicator of the company’s financial health. It is

calculated by dividing Net Income Less Preferred dividend by number of share

outstanding. The higher the EPS better is the financial health of the company.

Similarly, earning yield is the percentage of each rupee invested in stock that was

27

earned by the company. The higher the earning yield of the stock higher is the ability

of the company to pay dividend in future.

Table 4: Earning yield of stocks from NEPSE

Symbol EPS Annualized Market Price Earning Yield

NBL 39.92 295 13.53%

PRVU 29.07 252 11.54%

CZBIL 21.26 237 8.97%

PCBL 28.98 330 8.78%

JBNL 16.1 184 8.75%

NICA 36.78 422 8.72%

MBL 18.46 221 8.35%

ADBL 27.35 345 7.93%

KBL 19.71 250 7.88%

MEGA 15.44 197 7.84%

As we can see there are stocks with earning yield higher than the fixed deposit

rate these companies may be considered for alternative investments. However, all the

earnings of the company are not distributed as profit some of them are retained. So,

while making investment decision EPS, DPS and retention ratio must be considered

while making investment decision.

4. 3. 4 Value at Risk (VAR) from stock investment

Value at risk is a measure of risk of loss from investment. It helps to estimate

the amount of loss the company may have to occur from investment in assets in given

normal market conditions. For the sake of investment in different sector with

ordinary share, promoter share, mutual fund and productive sector eight different

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stocks are chosen to evaluate the value at risk. It is necessary to calculate value at risk

because unlike investment in fixed deposit there is a risk of loss of principal

investment in stock market which must be considered while making investment. It

gives the maximum loss potential of investment in a certain period of time.

Value at risk (VAR) Historical simulation method:

Table 5: Value at risk (VAR) Historical simulation method

Stock

1% Loss

Daily

1% Loss

Monthly

1% Loss

Yearly

5% Loss

Daily

5% Loss

Monthly

5% Loss

Yearly

NIBPO (2,973.66)

(13,298.62)

(45,293.46)

(1,753.03)

(7,839.77)

(26,701.31)

NABILPO (2,239.68)

(10,016.16)

(34,479.45)

(1,673.55)

(7,484.36)

(25,764.02)

NTC (2,782.91)

(12,445.53)

(42,842.29)

(1,546.06)

(6,914.18)

(23,801.25)

NMB (5,392.97)

(24,118.10)

(83,023.74)

(2,228.57)

(9,966.49)

(34,308.46)

NGPL (6,118.27)

(27,361.73)

(92,383.82)

(4,595.87)

(20,553.36)

(69,396.14)

BPCL (6,211.02)

(27,776.54)

(95,617.47)

(3,056.66)

(13,669.79)

(47,056.66)

NMBSF1 (5,147.05)

(23,018.30)

(66,713.36)

(2,368.46)

(10,592.07)

(30,698.72)

SEOS (3,496.70)

(15,637.72)

(37,170.43)

(2,470.27)

(11,047.40)

(26,259.37)

The above table gives the maximum chance of 1% loss and 5% loss of stock

value on a daily basis, monthly basis and yearly basis if Rs. 100,000 is invested in

each stock. For example, NIBPO has 1% chance of loss potential of Rs. 2,974 on a

daily basis, Rs 13,299 in a month and Rs 45,293 in a year when Rs. 100,000 is

invested in buying of NIBPO stock. Similarly, it has 5% chance of loss potential of

Rs. 1,753 daily, Rs. 7,840 monthly and Rs. 26,701 yearly.

29

Value at risk (VAR) Variance Co-Variance Method:

Table 6: Value at risk (VAR) Variance Co-Variance Method

Stock

1% Loss

Daily

1% Loss

Monthly

1% Loss

Yearly

5% Loss

Daily

5% Loss

Monthly

5% Loss

Yearly

NIBPO (3,671.23)

(16,418.23)

(55,918.46)

(2,614.07)

(11,690.49)

(39,816.38)

NABILPO (2,359.42)

(10,551.66)

(36,322.85)

(1,686.94)

(7,544.25)

(25,970.19)

NTC (2,821.29)

(12,617.20)

(43,433.25)

(1,998.20)

(8,936.24)

(30,761.94)

NMB (4,746.02)

(21,224.83)

(73,064.00)

(3,391.40)

(15,166.82)

(52,210.01)

NGPL (6,434.36)

(28,775.33)

(97,156.71)

(4,625.80)

(20,687.20)

(69,848.03)

BPCL (3,727.54)

(16,670.06)

(57,384.73)

(2,576.76)

(11,523.62)

(39,668.72)

NMBSF1 (5,214.11)

(23,318.23)

(67,582.65)

(3,710.89)

(16,595.59)

(48,098.58)

SEOS (3,727.54)

(16,670.06)

(39,624.28)

(2,576.76)

(11,523.62)

(27,391.33)

The above table gives the maximum chance of 1% loss and 5% loss of stock

value on a daily basis, monthly basis and yearly basis if Rs. 100,000 is invested in

each stock. For example, NIBPO has 1% chance of loss potential of Rs. 3,671 on a

daily basis, Rs 16,418 in a month and Rs 55,918 in a year when Rs. 100,000 is

invested in buying of NIBPO stock. Similarly, it has 5% chance of loss potential of

Rs. 2,614 daily, Rs. 11,690 monthly and Rs. 39,816 yearly.

The data from Variance co-variance model is more reliable for risk measurement than

historical method while making financial decisions.

30

4. 4 Selection of investment alternative

After the calculation of risk and return from different investment alternative

the evaluation and selection must be done. Fixed deposit in commercial bank has the

least amount of risk with return almost above all the stock return. In fixed deposit

company receives fixed amount of interest with no capital loss. Whereas, if we have

stock investment there is slightly lower return and there is a risk of decrease in share

value in future. No doubt most of the investment should be made in fixed deposit. It

may be because of liquidity crisis in the economy bank has provided higher return. In

any case the central bank brings policies to increase monetary base in the economy

and encourages bank to reduce the interest rate on deposit. The investment of

company may suffer so it is very necessary to diversify the investment into other

available alternatives.

Among the promoter share available in the market Nepal Investment Bank

promoter share and Nabil Bank promoter share is easily available in the market and it

provides same return as the ordinary share so maximum 10% of total investment can

be made in these shares.

Among the ordinary share available in stock market, Nepal Telecom and NMB bank

has the highest dividend yield and Nepal bank has the highest earning yield. So,

maximum 10% of total investment can be made in these shares.

Among the productive sector hydropower may be the sector with highest

potential in our country. Within hydro power sector also Ngadi Group power limited

and Butwal Power company limited has the highest dividend yield so maximum 5%

of investment can be made in these sectors.

31

Among the investment companies the mutual fund of NMB Sulav Investment

Fund-1 and Siddhartha Equity Oriented Scheme has the highest dividend yield in the

market. So, maximum 2% of the investment can be made in these stocks.

4. 5 Creation of portfolio

For the creation of investment portfolio by the insurance company it must

follow the investment guideline provided by the insurance board of the country. As

mentioned earlier it is required by law to invest 75% of the investment in fixed

deposit of commercial bank. Among the stock investment in promoter share has the

lowest rate of return so although maximum 10% of the total investment can be made

in this sector it will be beneficial for the company to invest only 7% in promoter

share. The best alternative for portfolio construction of ABC company limited is as

follows:

Table 7: Investment portfolio return

Sector Companies Ratio Return

Average

Return

Fixed Deposit

Any commercial bank with 9%

or more interest rate 0. 75 9% 9%

Promoter Share Nabil Bank

0. 10 2. 76%

4. 08% Nepal Investment Bank 5. 40%

Ordinary Share Nepal Telecom

0. 10 7. 12%

6. 27% NMB Bank 5. 41%

Productive Sector Ngadi Group power

0. 03 7. 91%

6. 01% Power company limited 4. 11%

Investment

Company

NMB Sulav Investment Fund-

1 0. 02

21.

26%

16. 85%

Siddhartha Equity Oriented

Scheme

12.

43%

Total Investment 100% 8. 30%

As we can see from the above table after diversification of investment in

different sector 8.3% return can be expected from investment and 0.7% is the cost of

32

diversification. One added advantage of diversification into stock is the increase of

share value over time and disadvantage is it is one of the riskiest sector to invest in.

33

CHAPTER V

SUMMARY, SUGGESTIONS PROPOSED CHANGE PROGRAMS AND ACTION

5. 1 Summary and benefits from cash flow smoothing and portfolio diversification

Cash flow smoothing can be achieved through implementation of online

payment system, accepting bank deposit in company’s name and in the places with

few bank daily reporting of cash collection and deposit can be done in order to

minimize the delay. Cash flow smoothing will definitely help to increase the

efficiency of the organization through working capital management and increase in

revenue from early investment.

Similarly, portfolio diversification will also help to reduce the risk of the

company. Since, investments in other sector can be bought and sold in the secondary

market whenever the need be to the organization. Whereas, in case of fixed deposit

once the contract is signed it cannot be withdrawn unless paying significant interest

rate to the bank.

5. 2 Implementation plan for cash flow smoothing

Cash flow smoothing can be achieved through acceptance of online payment

system. Different banks and even third party applications (Fintech companies) like

esewa and khalti are providing alternative payment solution for different services like

utilities, money transfer and other services. By collaborating with these bank and

Fintech company’s alternative payment solution can be accepted through website or

through mobile banking. It will completely eliminate the case of delay in deposit if

successful in all its branches.

Online payment may be difficult in places with lower internet penetration rate

and not all the target audience has access to it. But, banks are available in most of the

34

places with branch offices. So, implementation of policies to accept bank deposit in

company name should be accepted. Currently, only transaction more than Rs. One

Lakh is accepted through cheque. By developing policies and coordinating with

branch employees the delay in deposit can be eliminated.

Lastly, there are other remaining branches where there are few employees and

banks are far from company branches in such condition daily reporting of branches

can be done. Similarly, weekly branch audit can be done to check if there is any

significant amount remaining to be deposited. Daily reporting is especially useful

where employees are unaware about the importance and benefit of timely collection.

So, they must be brought into light of the hassles of cash management to the

company.

Currently, there are many branches with closing balance of more than Rs. Ten

Lakh. It also possesses great threat to the company as it may be unable to collect the

total sum so branch insurance can be done for branches with high amount of

collection and maximum delay in deposit.

Table 8: Daily Cash movement reporting format

Branch

Opening

Balance

Cash

Collection

Total

Funds Deposit

Closing

Balance

Arghakhanchi

Achham

Attariya

Baglung

5. 3 Implementation plan for portfolio diversification

Investment can be diversified by staying within the investment guideline.

First of all, a separate finance personal has to be separated to carry out stock valuation

of different companies. Similarly, available alternative has to be identified for

investment on the basis of risk and return to the company. The ratio of investment

35

must be as specified in the guideline and to make big investments approval from

Insurance Board should be taken. Only diversifying the portfolio is not enough it has

to be evaluated and necessary actions must be taken to reduce risk to the company and

increase return if possible. The investment has to be within the risk bearing capacity

of the company.

5. 4 Conclusion

Cash flow smoothing will not only help in effective management of the

company but it will also help to manage working capital of the company.

Opportunity gains from the market can be achieved and cash position of the company

can be improved.

As explained earlier the about 90% of the investment of ABC Life Insurance

Company is made in the fixed deposit in commercial bank with fixed interest rate.

With diversification of investment there is possibility of incremental revenue in future

with improvement of economy and business in the country.

ABC Life insurance company is eligible to go public in the following year and

these improvements in the organizational processes of the company will definitely

help to attract the investors to the company.

36

REFERENCES

Institue, P. (2017). The Standard for Portfolio Management (4th ed. ). Global

Standard.

| Xero. (2019). Retrieved from https://www. xero. com/resources/accounting-

glossary/s/what-is-cash-flow-management/

Stone, B. (1972). The Use of Forecasts and Smoothing in Control-Limit Models for

Cash Management. Financial Management, 1(1), 72. doi: 10. 2307/3664955

What is the interest rate offered by commercial banks after NBA calls end of

gentleman’s agreement?. (2018). Retrieved from https://www. sharesansar.

com/newsdetail/what-is-the-interest-rate-offered-by-commercial-banks-after-

nba-calls-end-of-gentlemans-agreement

37

ANNEXES

Unofficial translation of Investment guideline for life insurance company

Investment

Category

Investment Sector Investment Ratio Remarks

Category A Debenture and bonds issued

by Nepal government and

Nepal Rastra Bank

In any condition minimum of 25%

of total investment should be in

Category A

Category B Fixed deposit and short term

deposit in commercial bank

Minimum 35% of total investment

should be in fixed deposit and short

term deposit of “A” class

commercial bank

Minimum 5 years of operation

Must have published audited financial

statement timely and accurately

Minimum 3 years in continuous profit and

single commercial bank can be deposited

maximum of 15% of total investment.

38

Development bank fixed

deposit

Maximum 15% of total investment

in fixed deposit of development

bank

Minimum 5 years of operation,

Must have published audited financial

statement timely and accurately,

Minimum 3 years in continuous profit and

single development bank can be deposited

maximum of 5% of total investment.

For development bank with less than 5 years

of operation maximum 2% of total

investment can be invested in fixed deposit

in a same bank.

Citizen investment schemes

or such collective investment

provided by Citizen

Investment Trust (CIT)

Maximum 5% of total investment

in investment schemes provided by

Citizen Investment Trust (CIT)

39

Category

A+B

As mentioned above In any given condition minimum

70% of total investment should be

invested in Category (A+B) sectors.

Category C 1) Non-convertible

promoter share of

commercial bank,

development bank and

finance companies

Maximum 10% of total investment

can be made in promoter share

(non-convertible), debenture and

bonds of commercial bank,

development bank and finance

companies.

Minimum of 5% of total investment or 10% of

paid up capital can be invested in promoter

share (non-convertible), debenture and bonds of

a single commercial bank, development bank

and finance companies.

2) Fixed deposit of finance

companies

Maximum 10% of total investment

can be made in fixed deposit of

finance companies

Minimum 5 years of operation, must have

published audited financial statement timely

and accurately maximum 3% of total

investment can be made in fixed deposit of

single finance companies.

40

For companies with less than 5 years in

operation, maximum of 1% of total

investment can be made in fixed deposit of

single finance companies.

3) Ordinary share of Public

Companies

Maximum 10% of total investment

can be made in ordinary shares of

public companies.

Minimum of 2% of total investment or 10% of

paid up capital whichever is lower can be

invested in ordinary share of single public

company

4) Productive sector and

National priority sector

Maximum 5% of total investment

can be made in ordinary shares of

companies involved in producing

goods and services of productive

sector and national priority sector

41

(Hydropower, Health, Education,

Tourism and Agriculture).

5) Investment in share of

Investment companies

Maximum 2% of total investment

can be made in shares of

Investment companies