Sabin Csh Management Thesis Final

8/13/2019 Sabin Csh Management Thesis Final

http://slidepdf.com/reader/full/sabin-csh-management-thesis-final 1/84

CHAPTER - I

INTRODUCTION

1.1 Background of the Stud

Cash is the life-blood of every organization. In the absence of it, no organization can

run effectively and smoothly. Cash management leads the organization towards the

efficiency and success. “Corporate must adopt such a policy that makes optimum cash

management possible for improving the efficiency of cash management.Effective

method of collection and disbursement should be adopted.

“he term cash management has a meaning according to the purpose for which it is

used and persons with varying branches of knowledge, it implies various meanings.

Economists consider cash, as the means to satisfy human want, the lawyer views cash

as the legal tender money issued by a determinate authority. !owever, our concern of

the meaning of cash is to look from the viewpoint of balance sheet cash is an asset

constituting the most li"uid item among all the assets.

Cash as the most li"uid asset is of vital importance to daily operation of business #irm.

Cash is both the beginning and end of the working capital cycle i.e cash, inventories,

receivable and cash. Cash is like the blood stream in the human body that gives vitality

and strength to business enterprises. he steady and healthy circulation of cash is

needed throughout the entire business operation is the basis of business solvency.

“Cash is the money, which the firm can disburse immediately without any restriction.

he term cash includes coins, currency and che"ues held by the firm and balance in its

bank accounts. $ometimes cash items, such as marketable securities are also included

in cash%.

&



he aim of cash management is to maintain ade"uate control over cash position to

keep the firm sufficiently li"uid and to use e'cess cash in some profitable way.

Cash management is one of the main areas of (orking capital management. he cash

is the most li"uid assets so it should never be underestimated. It should be managed

well. he cash management involves formulation of policies and programmes for cash

receipt and cash payment. Cash management leads organization towards efficiency and

success.

Cash management is a broad term that refers to the collection, concentration, and

disbursement of cash. It encompasses a company)s level of li"uidity, its management

of cash balance and its short- term investment strategies. Cash management is

particularly important for new and growing businesses.

1.1.1 Or!g!n of Bank !n Ne"a#

he history of banking in *epal can be traced to &+ .. when e/arath dda was

established by the government to provide credit facilities to general public. hese

unorganized institutions although "uite underdeveloped could still mobilize funds from

wide range of different sources. lthough the e/arath dda was established, it was to

facilitate the growing trades with ibet and India. hus a need for the establishment of

a modern bank had become essential to promote the trade of the nation. In the year

&012 “reaty of peace and #riendship% were concluded between the 3overnment of

4ritain and 3overnment of *epal. s per the treaty, *epal could carry on import trade

free of duty via India. In other word, it meant that *epal was going to diversify its

foreign trade and for that the country needed a modern bank. 4ut it wasn5t till &026

.. that the 7dyog 8arishad 9industrial evelopment 4oard: was set up with the

following ob/ectives;-

o promote and protect the trade, commerce, industries and manufacturers of *epal,

and to consider and discuss "uestions connected with or affecting such trade,commerce, industries and manufacturers, to register and incorporate /oint stock

1



companies in conformity with *epal Companies ct and also to e'amine and

supervise their workings and to assists and advise 3overnment of *epal in economic

and financial matters.

hus, the “7dyog 8arishad% helped in opening new avenues for the advent of banking,

industry and commerce in *epal and thus helped to enhance the economic status of the

country. year after its formation, the 7dyog 8arishad formulated the company act

and the “*epal 4ank ct% in &02 .. which established the *epal 4ank <td with the

technical cooperation of the Imperial 4ank of India, as the first commercial bank of

*epal.

4efore &0=6 “$ardar >ulukikhana dda% 9local treasury of the government: issued

currency notes and the foreign e'change reserves of *epal were maintained by

?eserve 4ank of India. uring that period the Indian currency along with *epalese

currency was circulating in the economy. hus to manage the circulation of nationalcurrency and to maintain e'change rate stability, there was an urgent need for the

establishment of a Central 4ank. In &0=6, the *epal ?astriya 4ank ct was formulated

and *epal ?astra bank was established as central bank on pril 16, &0=6. It took over

the functions of >ulukikhana dda “government reasury% and started issuing

currency in &0=0@ and also thus relieved the various >al ddas 9?evenue Affices: of

their work. hus it helped the government to perform treasury functions and stabilize

the e'change rate. he *?4 focused mainly on eliminating dual currency system

prevalent in *epalese market. he *?4 tried to decrease the circulation of the Indian

currency, replacing it with the *epalese currency in various transactions of trade and

commerce. he initiation of the *epalese currency ct, &0=+ and the opening of the

bank5s branches in various part of the country were the ma/or steps undertaken by the

central bank in this respect. here were other government banking institutions.

?astriya 4ani/ya 4ank 9*ational Commercial 4ank:, a state-owned commercial bank,

was established in &066. In the same year, the <and ?eforms $aving Corporation was

established to deal with finances related to land reforms. here were two other

2



specialized financial institutions. *epal Industrial evelopment Corporation 9*IC:, a

state-owned development finance organization head"uarter in Bathmandu, was

established in &0=0 with 7nited $tates assistance to offer financial and technical

assistance to private industry. he co-operative 4ank, which becomes the gricultural

evelopment 4ank in &06, was the main source of financing for small agribusiness

and cooperative. lmost = percent of the bank was state-owned@ 1& percent was

owned by the *epal ?astra 4ank, and = percent by cooperative and private individuals.

1.1.$ Co%%erc!a# Bank !n Ne"a#

he history of banking dates to the si'teenth century. !owever in *epal formal

banking system was only introduced only in &00 Bartik 2Dth was the establishment of

*epal bank limited 9*4<:, which was regarded as pioneer institution in modern

banking system and served as a role financial institution of the country for nearly two

decades prior to establishment of this bank, the banking need of people were fulfilled

to certain e'tent only by organized financial institution the “e/artha dda%.

!owever the service it offered were not sufficient. ctually, the formation of high

committee board “7dhog 8arisad% was indeed a landmark in opening of new avenue in

the field of banking industries and commerce. ccordingly, *4< was established on

*ovember &02 under *epal bank act as /oint venture between government and

private and overcoming its limitations. It regulates currency achieving stable e'change

rate and mobilized capital for economic development and for simulation of trade

industry and banking sector. *epal ?astra 4ank 9*?4: comes into e'istence in pril16th &0=6 as a country5s central bank. fter this *?4 diverted its attention toward

development of banking system by formulating relevant policies procedure in this

commotion commercial bank act &062 was formulated, credit control regulation was

too formulated. !ence, further shouldering the banking service. he ?astriya 4ani/ya

4ank 9?44: was established in &066 under ?44 ct &06 with fully government

owned commercial bank.

*?4 91DD+: stated “he function of the banks can be classified into Class , Class 4,

and Class C and Class . Class 5 includes 21 licensed Commercial 4anks that can



be government-owned, privately-owned or /ointly owned by government and the

private sector. hey collect deposits from public, invest in loans and overdrafts, sell

and purchase bills, open letter of credit for e'port and import, provide bank guarantee,

deals in foreign e'change and invest in stock and bonds. Class 45 includes +

evelopment 4anks. hey take high risky by providing loans for venture capital. hey

provide loans to industry, agriculture, import-e'port, cottage and small industries, co-

operatives. #urther, #inance Companies fall under C5 class with 0 companies

operating to provide service. hey accept fi'ed and saving deposits with higher rate of

interest. hey provide loans to industries and individuals and charge higher rate of

interest. Class 5 includes 1& >icro Credit evelopment 4anks. >oreover, &6 saving

and credit co-operative 9limited banking: and 2+ *on-3overnment Arganization

9*3As: are also actively participating in its own way.

<ist of 4anks and *on-bank #inancial Institutions

Class ; Commercial 4anks 21

Class 4; evelopment 4anks +

Class C; #inance Companies 0Class ; >icro Credit evelopment 4anks 1&

$aving and Credit Co-operatives &6

*on-3overnment Arganizations 9*3As: 2+

9$ource; s of >id-pril@ 1D&1 <icensed by *?4:

1.1.& 'unct!on( of co%%erc!a# )ank

4anks are financial service firms, producing and selling professional public5s funds

and performing various roles in the economy. Commercial banks are established to

improve people5s economic welfare and facility, to provide loan to agriculture,

industry and commerce and to offer banking services to the people and the country.

Commercial bank has been playing a great role for the economic development of the

country directly or indirectly. In *epal, the commercial banks perform the following

functions;

>a/or functions of commercial banks

ccept deposits

=



3iving loan

Investment of funds

gency functions

Credit Creation

3eneral 7tility #unctions

1.$ Introduct!on of Co%"an

*epal $4I 4ank <td. was incorporated in *epal on pril 1+ &002 as a public limited

company. It commenced operations on Fuly , &002, and is principally engaged in the

business of banking, as defined in the banks and financial institutions ct, 1DD6.he

bank is listed in *epal stock E'change Bathmandu

*epal $4I 4ank has since e'panded into a network of =0 banking and non-banking

outlets including =D full-fledged commercial banking branches, 6 e'tension counters

and 2 administrative offices. network of 6+ online >s covering all ma/or cities in

*epal, 1 hour >obile 4anking and Internet 4anking services support the delivery for

speedier customer service. s on Fuly &6, 1D&& the bank with a staff complement of

=D= employees, had an e"uity of ?s. 1.& billon and total assets of ?s. 6.& billion, with

more than 2, DD,DDD banking customers.

he bank has been taking up diverse community service. Initiatives beyond the call of

regular banking business, to establish itself as a responsible corporate citizen of this

great nation. Its aims is to become “the banker to every *epali%

1.& O)*ect!+e( of the Co%"an

• o care for the customers evolving needs and e'pectation by providing suitable

products and services.

• o create a great place to work.

• o work in harmony and in mutual satisfaction with our 4usiness 8artners.

6



• o provide returns on the investment of our owners.

• o invest in local communities in which we operate for the benefit of the

society at large.

,!(!on of Ne"a# SBI Bank

Gision of *epal $4I 4ank is to become the leading player in the financial sector in

the country and to be a better bank. *epal $4I 4ank graduated as a commercial bank

has successfully gained the position in the market and aims to enhance the network

e'tensively by providing access to financial services to as many people as it is

possible. *epal $4I 4ank strives to remain close to its customer and understand their

needs. Aver the years, we have grown larger and stronger in terms of business,

geography and resources.

1. State%ent of the Pro)#e%

*epal is the country which is made up of villages and rural areas mostly and where

there is predominance of agriculture sector. It is very difficult to solve the problem of

credit through commercial banks and very nominal population of the country is using

banking facilities.

8resently, our economy is in critical phase due to political uncertainty, labor-

management conflict, power crises and so on. In such as situation banking system are

facing different problems which has created to increase risks in the operation of

banking and financial institutions. he problem like li"uidity crisis, uncertain

directives by *?4, increase in interest rates, fraud, etc.

he commercial banks are facing a huge burden due to e'cessive competition from

rural banks, finance companies and local co-operatives, which provide loans to the

local customers. In addition, the large numbers of commercial banks in the economy is

the emerging challenges for commercial banks. herefore, *?4 should take every step



very carefully to stabilize the economy and banking sector should take ade"uate

decision to decrease risks.

he 8roblem $tatement gives an e'planation about the issue that is being addressed by

the pro/ect. 8roblem $tatement is a brief analysis or summary of the problems

identified relating to the pro/ect or issue to be addressed by the pro/ect. $ome of the

statements of the problem are that found during the study are;

• (hat are the ma/or factors affecting cash policyH

• !ow *epal $4I 4ank is operating its cash managementH

• (hat is the cash demand of banksH

• !ow well cash can be managed appropriately by banksH

1. O)*ect!+e of the Stud

he financial institution play very vital role in the economic development of the

nation. he efficient performance of the banks and financial institution give shape to

economic indicators of the nation. he main purpose of this study is to e'amine the

way and techni"ues used by *epal $4I 4ank in Cash >anagement. $tudy will cover

the areas where cash are managed by bank. he ma/or ob/ectives of the study are to

e'amine the management of cash of *epal $4I 4ank. he ob/ectives of study on Cash

>anagement of *$4I are as follows;

• o e'amine the cash management practice followed by the bank.

• o analyze the effective utilization of surplus of cash.

•

o e'amine their demand for cash.

+



• o suggest appropriate cash management policy for future.

1./ S!gn!f!cance of the Stud

It is evident that management of cash is a daily task for banks, for cash management is

one of the most important functions in any organization. proper cash management

considerably contributes to improve the overall financial performance and leads the

organization towards success. n organization cannot achieve its goals unless cash is

controlled effectively and capital is allocated. good cash management program is a

very significant component of overall financial management.

1.0 !%!tat!on of Stud

his study mainly focuses on the cash management of *epal $4I 4ank and evaluating

whether the managerial decisions about cash management of the bank is satisfactory or

not. he limitation of the study is as follows

• ?eport covers a period of five fiscal years data due to the time constraint.

• $tudy is based on secondary data.

• ime constraints are one of the main limitations of the study because it must be

submitted within stipulated period of time.

• It is only for partial fulfillment of >4.

1.2 Organ!3at!on of Stud

his whole study will be divided into five chapters, each one focusing on a particular

area. he units will be listed in the contents.

Cha"ter I

0



he first chapter includes 4ackground of the study, Introduction of the company,

ob/ective of the company, statement of the problem, ob/ectives of the study,

significance of the study, and limitations of the study and organization of the study.

Cha"ter II

he second chapter includes conceptual framework along with review of published and

unpublished reports, booklets, /ournals, magazines, research work and thesis and

useful website relating to li"uidity.

Cha"ter III

he third describes the various se"uential steps that will be strictly followed in

conducting this research. he main financial tool adopted to analyze the data is

accounting ratio. Ather simple statistical analysis such as standard deviation,

coefficient of variation, etc. will be calculated where necessary. >oreover, the

forecasting of the ne't five years data will be done with the help of regression.

Cha"ter I,

his chapter deals with the static evidence and facts to clarify the research work. !ere,

the study presents the collected data for various purpose of analysis to obtain the

answer to the research "uestion. !ere, the calculations of different accounting rations

and their applications will be presented.

Cha"ter ,

his is the concluding sections, which includes ma/or findings, conclusion and

recommendations. An the basis of the data analyzed the research will reach in final

phase to conclude the analysis of this chapter. he suggestions to the related banks will

also be given which will help the bank to improve the company in many ways.

&D



CHAPTER 4 II

RE,IE5 O' ITERATURE

$.1 Introduct!on

?eview of literature is an essential part in the field of research of all studies.It supports

the researcher to e'plore the relevant and true facts for the reporting purpose in the

field of research study. <iterature here means the related printed material about the

sub/ect matter of the research work. It may be in various forms like book, booklet,

thesis, reports etc in the courses of research. ?eview of literature is vital while doing

research work as it gives the finding of the previous study. It can be used as a

secondary data5s@ it gives the valuable information about the sub/ect.he purpose of

literature review is, thus, to find out what research studies have been conducted in

one5s chosen field of study, and what remains to be done.

$.$ Conce"tua# 'ra%e6ork

$.$.1 Conce"t of Bank

4anking, transactions carried on by any individual or firm engaged in providing

financial services to consumers, businesses, or government enterprises. In the broadest

sense, banking consists of safeguarding and transfer of funds, lending or facilitating

loans, guaranteeing creditworthiness, and e'change of money. hese services are

provided by such institutions as commercial banks, savings banks, trust companies,

finance companies, and merchant banks or other institutions engaged in investment

banking. narrower and more common definition of banking is the acceptance,

transfer, and most important, creation of deposits. his includes such depository

institutions as commercial banks, savings and loan associations 9more common in the

7nited $tates:, building, societies, and mutual savings banks. ll countries sub/ect

banking to government regulation and supervision, normally implemented by central

&&



banking authorities. #or further information on central banks and investment banking,

see the relevant articles.

$.$.$ Conce"t of Co%%erc!a# Bank

he commercial banks, in the modern world play an important role in accelerating the

development of an economy. he role of the commercial banks is significant not only

in mobilizing savings but also in making investment for the development of the

different sectors of an economy. heir role is also important in reducing poverty,

raising employment opportunities and minimizing disparity in the income, wealth and

opportunities between richer and poorer section of society. he commercials banks are

therefore, called the engines of economic growth in modern time. $imilarly the nations

in which the commercial banks are less developed their economics are also less

developed. he development of commercial banks has thus, become synonymous with

the development of the countries.

In *epal, Commercial banks are the heart of the financial system. hey hold the

deposits of many persons, government establishment and business units. hey make

fund available through their lending and investing activities to borrowers,

individual business firms and services from the producers to customers and the

financial activities of the government. hese facts show that the commercial

banking system of the nations is important for the functioning of the economy.

Evaluation of financial performance is a study of overall financial position of any

organization. It is closely related to the decision making. In the modern conte't, itgives vital support for the investment decisions, financing decisions and dividend

decisions. #inancial performance analysis is undergone with the help of periodically

made financial statements of the firm.

$.$.& O)*ect!+e(

he main ob/ectives of commercial banks in *epal are;

• o bring about banking consciousness among the general public.

• o deal with the growing financial transaction of the national economy.

&1



$.$. 'unct!on(

he functions which these banks performs in order to attain the above ob/ectives are as

follows;

• o mobilizes savings by opening deposit accounts.

• o advance loans against approved shares, debentures, fi'ed assets and

movable assets or to invest in them.

• o provide loans to agriculture, cottage industry, irrigation, electricity

generation and other pro/ects.

• o help companies and corporate sector for issuing shares and debentures,

provide guarantee, underwrite the issues and provide agency services.

$.$. '!nanc!a# State%ent(

“he #inancial $tatements are the means of presentation of a firm)s financial

condition and basically consist of two types of statements - he 4alance $heet

Income $tatement. hese are prepared to report the overall business activities as

well as financial status of the firm for a specified period to its stakeholders.

hese contain summary of information regarding financial affairs that is organized

systematically. he top management is responsible for preparing these statements. he

basic ob/ective of financial statements is to assist in decision making. !ence financial

statement refers to any formal and original statement that discloses the financial

information related to any business concern during a period. he income

statements and balance sheet usually prepared at the end of each financial year show

the firm5s position.

• Ba#ance Sheet

“4alance sheet is one of the basic financial statements of an enterprise. It is

also called the fundamental accounting report. s the name suggests, the balance

sheet provide information about financial standing or a position of a firm at a

particular point of time usually end of the financial year. It can be visualized as a

snapshot of the financial status of a company% 9Bhan and Fain, &002:.

&2



4alance sheet summarizes the assets, liabilities and owner5s e"uity of a business

at a moment of time, usually at the end of the financial year. 4alance sheet is a

financial statement, which contains information regarding different capital

e'penditures made on purchase of assets on particular date and information

regarding various sources of funds ac"uired by the business concern to finance

these assets and also the different sources of capital and liabilities at that

particular point of time.

• Inco%e State%ent

“Income statement is designed to portray the performance of the business firm for

specific period of time i.e. for a year or month or "uarter. he business revenues

and e'penses resulting from the accomplishment of the firms operation are

shown in the income statements. It is the “$coreboard% of the firm5s performance

during particular period of time. It shows the summary of revenues, e'penses and net

income or loss of a firm for a particular period of time. Income statement also serves

as a true measure of the firm5s profitability%.

$.$./ 7ean!ng of Ca(h 7anage%ent

he term cash management is concerned with the management of current assets and

current liabilities of the business, which is necessary for day- to- day operation. Cash is

the important current assets for the operation of business. Cash management is

concerned with the decision regarding the short-term funds influencing overall

profitability and risk involving in the firm. he management of cash has been regarded

as one of the considering factors in the decision-making issues. “Cash is the money,

which a firm can disburse immediately without any restriction. he cash includes

coins, currency and che"ues held by the firm and balance in its bank accounts.

Cash is the most li"uid asset, is of vital importance to the daily operations of business

firm. Cash is both the beginning and end of the working capital cycle-cash,

inventories, receivables and cash. Its effective management is the key determinant of

&



efficient working capital management. Cash is like the blood stream in the human

body that gives vitality and strength to business enterprises. he steady and healthy

circulation of cash throughout the entire business operation is the basis of business

solvency. de"uate supply of cash is necessary to meet the re"uirement of the

business. Its shortage may stop the business operation and may degenerate a firm into a

state of technical insolvency and even of li"uidation. herefore, for its smooth running

and ma'imum profitability, proper and effective cash management in a business is of

paramount importance.

$.$.0 'unct!on( of ca(h %anage%ent

here are various functions of cash management. hey are as follows;

• Ca(h "#ann!ng;

Cash flows 9inflows and outflows: should be planned to pro/ect cash surplus or

deficit for the period. Cash budget is prepared for this purpose.

• To de(!gn and %anage ca(h f#o6(;

he cash flows 9inflows and outflows: should be 8roperly managed. he

inflows of cash should be accelerated and the outflows of cash should be

decelerated as possible.

• To %a!nta!n ca(h and %arketa)#e (ecur!t!e( !n a%ount c#o(e to o"t!%a#

#e+e#;

he firm should try to maintain the appropriate level of cash balances. he cost

of e'cess cash and the danger of cash deficiency should be matched to maintain

the optimal level of cash balances.

• To "#ace the ca(h and %arketa)#e (ecur!t!e( !n the "ro"er !n(t!tut!on( and

!n the "ro"er for%(8

&=



he idle cash of precautionary cash balances should be properly invested to

earn profits. he firm should take to appropriate decision about the division of

such cash balances between bank deposits and marketable securities.

$.$.2 O)*ect!+e( of Ca(h 7anage%ent

he basic ob/ectives of cash management are two-fold, 9a: meeting payment schedule

and 9b: minimizing funds committed to cash balances. hese are conflicting and

mutually contradictory and the task of cash management is to reconcile them.

• 7eet!ng Pa%ent Schedu#e

In the normal course of business, firms have to make payment of cash on a continuous

and regular basis to suppliers of goods, employees and so on. t the same time, there is

a constant inflow of cash through collections from debtors. o meet the payment

schedules, a firm should maintain an ade"uate amount of cash balance. he advantages

of maintaining ade"uate cash balances are, 9i: the relationship with the bank is not

strained@ 9ii: it prevents insolvency or bankruptcy arising out of the inability of a firm

to meet its obligations@ 9iii: it helps in fostering good relations with trade creditors and

suppliers of raw-material, as prompt payment may help their own cash management,

9iv: a cash discount can be availed of if payment is made within the due date@ 9v: it

leads to a strange credit rating which enables the firm to purchase goods on favorable

terms and to maintain its line of credit with banks and other sources of credit. 9vi: o

take advantage of favorable business opportunities that may be available periodically@

and 9vii: finally, the firm can meet unanticipated cash e'penditure with minimum of

strain during emergencies, such as@ strikes, fires, or a new marketing campaign by

competitors.

• 7!n!%!3!ng 'und( Co%%!tted to Ca(h Ba#ance(

he second ob/ective of cash management is to minimize cash balances.In minimizing

the cash balances, two conflicting aspects have to be reconciled. high level of cash

balances will, as shown above, ensure prompt payment together with all the

advantages. 4ut it also implies that large funds will remain idle, as cash is a non-

&6



earning asset and the firm will have to forego profits. low level of cash balances, on

the other hand, may mean failure to meet the payment schedule. he aim of cash

management, therefore, should be to have an optimal amount of cash balances. 9Bhan,

>.J and Fain, 8.B, #inancial >anagement, &0+6; 662-66:

$.$.9 I%"ortance of Ca(h 7anage%ent

Cash is the most li"uid asset for the operations of business firm. Cash5 is both the

beginning and the end of the working capital cycle-cash, inventories, receivable andcash@ its effective management is the key determinant of efficient working capital

management. Cash is like the blood stream in the human body gives vitality and

strength to a business enterprise. he steady and healthy circulation of cash throughout

the entire business solvency%. ccording to F.>. Beynes it is cash, which keeps a

business going. !ence, every enterprise has to hold necessary cash for its e'istence. In

a business firm ultimately, a transaction results in either an inflow or an outflow of

cash. In an efficient managed business, static cash balance situation generally does not

e'ist. de"uate supply of cash is necessary to meet the re"uirement of the business. Its

shortage may stop the business operations and may generate a firm into a state of

technical insolvency and even of li"uidation.

Efficient and optimal cash flow management is important to all firms. “Cash is a non

earning asset in the sense that although it is needed to pay for labor and raw materials

to buy fi'ed assets, to pay ta'es, to serve debt, to pay dividends and so on. Cash

management is to reduce cash holdings to the minimum necessary level to conduct

business% 9(eston and Copeland, &0+&;1+:.4usiness analysts report that poor

management is the ma/or reason why most businesses fail. It would probably be more

accurate to say that business failure is due to poor cash management. #or this, financial

manager should take a look at the cash flow process to find out. herefore, we need to

perform a cash flow analysis on a regular basis, and use cash flow forecasting so you

can take the steps necessary to head off cash flow problems.

&



$.$.1: Eff!c!enc of Ca(h 7anage%ent

Cash can perform a number of functions as it makes payment possible. Its serves to

meet emergencies. !owever, if cash is kept idle it contributes directly nothing to the

earning of corporations. s such corporation must adopt such a policy that makes

optimum cash management possible. he financial manager of the corporation should

try to minimize the corporations5 holding of cash while still efficiency of cash

maintaining enough to ensure payment of obligation. #or improving the efficiency of

cash management, effective method of collection and disbursement should be adopted@

some methods for efficiency of cash management are briefly described below.

• S"eed Ca(h Co##ect!on of u(ea)#e ca(h

firm can conserve cash and reduce its re"uirement for cash balance if it can speed-up

its cash collection. ?educing the lag for gap between the times a customer pays his bill

can accelerate cash collection and the time the che"ue is collected and funds become

available for use. (ithin this time gap, the delay is cause by the mailing time. he

amount of che"ues sent by customers but not yet collected are called deposit float. he

greater the deposit floats, the longer the time taken. here are mainly two techni"ues,

which can be used to save mailing and processing time which is concentration

banking, lock bo' system.

• Concentrat!on Bank!ng

Concentration banking is a system of operating through number of collection centers,instead of a single collection center centralized at the firm head office. o this system,

the firm will have a large number of bank accounts operated in the area the firm its

branches. ll branches may not have the collection centers. he collection centers will

be re"uired to collect che"ues from customers and deposit them in their local bank

accounts. he collection center will transfer funds above some pre-determined

minimum to a control generally at the firm5s head office, each day. connection bank

is one where the firm has a ma/or bank account usually the disbursement.

&+



• S#o6!ng D!()ur(e%ent

part from speedy collection of account receivable the operation cash re"uirement can

be reduce by slow disbursement of account payable. It may be recalled that a basic

strategy of the cash management is delay payment as long as possible without

impairing the credit rating of the firm. In fact, slow disbursement represents a source

of funds re"uiring no interest payments. here are some techni"ue to delay payment is

avoidance of early payment centralized disbursement, float and accruable.

• Ca(h +e#oc!t

Efficiency in the use of cash depends upon the cash velocity i.e., level of cash over a

period of time.

• 7!n!%u% ca(h )a#ance

Corporations are re"uired to keep a minimum cash balance re"uirement of bank either

for the service it renders on in consideration of lending arrangement.

• Snchron!3ed ca(h f#o6(

$ituation in which inflow coincides with out flows, thereby permitting a firm to hold

transaction balance a minimum.

• U(!ng f#oat

#loat is defined as the difference the balance shown in a firm5s 9or individual5s:

checkbook and the balance on the bank5s record.

&0



• O+erdraft S(te%

$ystems where depositors may write che"ues in e'cess of their balances with their

banks automatically e'tend loans to cover the shortage. >ost of the foreign countries

use overdraft system.

• Tran(ferr!ng fund

here are two principal method-wire transfer and electronic depository transfer

che"ues. (ith a wire an electronic depository transfer che"ue 9C: arrangement in

the movement of funds an electronic che"ue image is processed through an automatic

clearing house. he funds become available on business day later. #rom small transfer,

a wire transfer may be too costly.

$.$.11 D!fferent Techn!;ue( of Ca(h 7anage%ent

• Ca(h P#ann!ng

Cash planning can help to anticipate future cash flows and needs of the firm and

reduces the possibility of idle cash balance and cash deficiencies. Cash planning is a

techni"ue to plan for and control the use of cash. he forecasts may be based on the

present operation or anticipated future operation. Cash plan is very crucial in

developing the overall operation plans of the firm. Cash planning may be done on

daily, weekly or monthly basis. It depends upon the size of the firm and philosophy of

management.

• Ca(h Budget

Cash 4udget is the most significant device to plan and control cash receipt and

payment. cash budget is a summary statement of the firm e'pected cash inflows and

outflows over a pro/ected time period. his information helps the financing of these

needs and e'ercise control the cash and li"uidity of the firm, plans for the financing of

these needs and e'ercise control over the cash and li"uidation of the firms.

he time horizon of cash budget may differ in various firms. firm whose business is

affected by seasonal variations may prepare monthly cash budget. aily or weekly

1D



cash budget should be prepared for determining cash re"uirement. If cash flows show

e'treme fluctuation, cash budget for longer interval may be prepared of cash flows are

relatively stable.

• Ad*u(ted net !nco%e %ethod

his method is also called the sources and uses approach. wo ob/ectives if he

ad/usted net income approaches are to pro/ect the company5s need for cash at some

future date and to show whether the company can generate this money internally or

not, how much will give to either borrow or rise in the capital market. It is based on

8erforma financial statement. In preparing the ad/usted net income forecast items such

as net income, depreciation, ta'es, dividend etc. can easily be determined from the

company5s annual operating budget.

• ong Ter% Ca(h 'oreca(t!ng

<ong erm Cash #orecasting are prepares to give an idle of the company5s financial

re"uirement of disbursement of distant future. Ance a company has developed long

term cash forecast, it can be used to evaluate the impact of say new product

development on the firm financial condition three, five or more years in future. he

ma/or uses of the long term cash forecasts are company5s future financial needs,

especially for it working capital re"uirement, to evaluate proposed capital pro/ects and

it help to improve corporate planning. <ong term cash forecasting not only reflects

more accurately the impact of any recent ac"uisitions but also foreshadows financing problems.

$.$.1$ Deter%!n!ng the O"t!%u% Ca(h Ba#ance

#inancial manager responsibilities are to maintain a sound li"uidity position of the

firm. $o that dues may be settled in time. he firms need cash not only to purchase raw

materials and pay wages but also for payment of dividend, interest, ta'es and countless

other purpose. he te't of li"uidity is really the availability of cash to meet the firmobligations when they become due. hus the cash balance is maintained for transaction

1&



purpose and additional amounts of cash balance. tradeoff between risks and return

influences such a decision. he financial manager should determine the appropriate

amounts of cash balance. If the firm maintains small cash balance, its li"uidity position

becomes weak and suffers from a capacity of cash to make payment. 4ut investing

released funds in some profitable opportunities can attain a higher profitability. If the

firm maintains a high level of cash balance it will have a sound li"uidity position but

forego the opportunity to earn interests. hus the firm should maintain an optimum

cash balance to find out the optimum cash balance the transaction costs and risk of too

small a balance should be matched with the opportunity costs of too large a balance. If

the firm maintains larger cash balance its transaction costs would decline but the

opportunity costs would increase.

$.$.1& Ca(h 7anage%ent 7ode#(

. here are different types of analytical models for cash management.

•4aumol >odel

• >iller-Arr >odel

• Argler5s >odel

• Cash >anagement >odels

Bau%o# 7ode#

In view of minimizing the opportunity cost of holding cash and ma'imizing the return

on the available funds, the cash balance should be maintained at a minimum level and

the funds not re"uired firm immediate use be invested in the marketable securities.

4aumol model is one of the methods that can be used for this purpose. 4aumol5s

>odel, also known as inventory model, is one of the simplest models to determine

optimal cash under the condition of certainty. ccording to this model carrying cost of

holding cash is balanced against the fi'ed costs of transferring marketable securities

into cash or cash into marketable securities.

he purpose of this model is to determine the minimum cost amount of cash that a

financial manager can obtain by converting securities to cash considering the cost of

11



conversion and the counter-balance cost of keeping the cash balance which otherwise

could have been invested in marketable securities.

he total cash associate with cash management, according to this model has two

elements; 9a: Cost of converting marketable securities into cash and 9b: the lost

opportunity cost.

he conversion costs are incurred cash times marketable securities are converted into

cash symbolically, total conversion cost per period.

KbLCMMMMMMMMMMMMMMM. 9i:

(here,

K otal transaction cash needs for the period

bK Cost per conversion assumed to be independent of the size of transaction

CK Galue of marketable $ecurities sold at cash conversion

he opportunity cost is derived from the lostLforfeited interest rate that could have

been earned on the investment of cash balances. he total opportunity cost is the

interest rate times the average cash balance kept by the firm. $ymbolically, the averagelost opportunity cost

K I9CL1:MMMMMMMMMMMM... 9ii:

(here,

IK interest rate that could have been earned

CL1K verage cash balance i.e. the beginning cash plus the ending cash balance of the

period divided by 1

he total cost associated with cash management compromising total conversion cost

plus opportunity cost of not investing cash until it is needed in interest-bearing

instruments can be symbolically e'pressed as

I9CL1NbLc:MMMMMMMM.MM 9iii:

o minimize the cost, therefore the model attempts to determine the optimal

conversion amount .i.e. the cash withdrawal that costs the least. $ymbolically, the

optimal conversion 9cO: amount.

COK 1bLiMMMMMMMM 9iv:

12



he model in terms of e"uation 9IG: has important implications. #irst, as the total cash

needs for transaction rises because of e'pansionLdiversification etc., the optimal

withdrawal increases less than proportionately. his is the result of economy of scale

in cash management. Each pro/ect does not need its own additional cash balance. It

only needs enough added to the general cash balance of the firm to facilitate e'panded

operations. $econdly, as the opportunity interest rate increases the optimal cash

investment opportunity and financial managers want to keep as much cash invested in

securities for as long as possible. hey can afford to do this as the higher interest5s

rates because at those higher rates any shortfall costs caused by a lower withdrawal are

offset.

In sum, the model of cash management is very simplistic. #urther, its assumption of

certainty and regularity of withdrawal of cash do not realistically reflect the actual

situation of any firm. In addition, the model is concerned only with transaction

balances and not with precautionary balances. In addition, the assumed fi'ed nature of

the cash withdrawals is also not realistic. *evertheless, the model does clearly and concisely demonstrates the economies of

scale and the counteracting nature of the conversion and opportunity costs, which are

undoubtedly ma/or considerations in any financial manager5s cash management

strategy 94aumol, &0=1-==-==6:.

otal CostK!olding Cost N ransaction Cost

K 9verage Cash 4alance P Apportunity Cost: N 9Cost 8er ransaction P *o. of

ransaction:

Ar, otal CostK b 9LCO: NI9cOL1:

7!##er-Orr 7ode#

(hen cash balance fluctuates unpredictably, we use control theory to determine

optimal behavior regarding cash holdings. $tochastic model L >iller-Arr >odel, which

specifies two controls limited i.e. upper and lower limit.

he ob/ective of cash management according to >iller-Arr is to determine the

optimum cash balance level, which minimizes the cost of each management.

1



$ymbolically,

C K bE 9*: L tN/E 9>:MMMMMMM9i:

(here

bK the fi'ed cost per conversion

E 9>: K the e'pected average daily cash balances

E 9*: K the e'pected number of conversions

K the number of days in the period

F K the lost opportunity costs

C K total cash management costs.

he >iller-Arr model is in fact an attempt to make the 4aumol model more realistic as

regards the pattern of cash flows. s against the assumption of uniform and certain

levels of cash balances randomly fluctuate between an upper bound 9h: and a lower

bound 9o:. (hen the cash balances hit the upper bound 9h:, the firm has too much cash

and should buy enough marketable securities to bring the cash balances back to the

optimal bound 9z:. (hen the cash balances hit zero, the financial manager must returnthem to the optimum bound 9z: by selling converting securities in to cash. ccording

to the >iller-Arr model, as in 4aumol >odel, the optimal cash balance 9z: can be

e'pressed symbolically as

Q K 292b1:LiN<MMMMMMMMM9ii:

hus, as in 4aumol model, there are economies of scale in cash management and the

two basic costs of conversion and the lost interest that have to be minimized. >iller-

Arr model also specifies the optimum upper boundary 9h: as three times the optimal

cash balance level such that

7pper limit 9h:K 2Q-1<MMMMM.9iii:

verage Cash 4alance K 9hNQ:L2

#urther, the financial manager could consider the use of less li"uid potentially more

profitable securities as investments for the cash balances in e'cess of cash 9>iller and

Arr, &066@ &2-2=:

1=



Org#er<( 7ode#

ccording to this model, an optimal cash management strategy can be determined

though the use of a multiple linear programming model. he constrictions of the model

comprise three sections

• $election of the appropriate planning horizon

• $election of the appropriate decision variables

• #ormulating of the cash management strategy itself

he advantage of linear programming model is that it enables co-ordination of the

optimal cash management strategy with the other operations of the firm such as

production with less restriction on working capital balances. he model basically

uses one-year planning horizon with twelve month periods because of its

simplicity. It has four basic sets of decisions variables which influence cash

management of a firm and which must be incorporated into the linear programming

model of the firm. hese are

• 8ayment schedule

• $hort term financing

• 8urchase and sale of marketable securities and

• Cash balance it.

he formulation of the model re"uires that the financial manager first specify an

ob/ective function and then specify a set of constraints. Argler5s ob/ective function is

to minimize the horizon value of the net revenues from the cash budget over the entire

planning period using the assumption that all revenue generated is immediately re-

invested and that any cost is immediately financed. he ob/ective function recognizes

each operation of the firm that generates cash inflow or cash outflows as adding or

subtracting profit opportunities for the firm is cash management operations. In the

ob/ective function decision variables which cause inflows such as payments on

receivables have positive co-efficient while decision variables which generate cash

inflows, such as interest on short-term borrowings have negative co-efficient. he

purchase of marketable securities would for e'ample produce revenue and they have a

16



positive co-efficient while the sale of those securities would incurred conversion costs

and have a negative co-efficient. very important feature of this model is that it

allows the financial managers to generate cash management with production and other

aspects of the firm.

Ca(h 7anage%ent 7ode#

In this model, it is assumed that the firm on average is growing and is a net user of

cash. >arketable securities represents a buffer stock between episodes of e'ternal

financing which is drawn as re"uired periodically ordering costs are represented by

clerical and transaction costs of making transfer between the investment portfolio and

the cash account; he holding cost is the interest foregone a cash balance held.

ssuming that e'penditure occurred evenly over time and that cash replenishment

come in lump sums at periodic intervals. he optimal size of the cash transfer is

formulated as follows;

(here,

CK the optimal size of the cash balance.

K the total cash usage for the period of time involved.

bKthe most of the transaction in the purchase or sale of marketable securities.

iKthe applicable interest rate on marketable securities.

$.$.1 7ot!+e( for ho#d!ng Ca(h

he firm holds cash for various motives, they are;

• Tran(act!on 7ot!+e(

he principle motive for holding cash is to conduct day to day operations. cash balance associated with routine payments and collections. <ike payments of purchases,

1



labour, ta'es, and dividends etc. <ikewise, in the course of daily business transactions,

cash are generated from sales of goods or services, return on outside investments etc.

• Precaut!onar 7ot!+e(

Cash held in reserve fro random, unforeseen fluctuation in cash inflow and outflow.

#or e'ample@ flood, strike, inefficiency in collection of debtors, cancellation of order

failure of important customers, sharp increase in cost of raw-materials etc.

• S"ecu#at!+e 7ot!+e(

cash balance that is held to enable the firm to purchase that might arise. #or

e'ample@ purchasing of raw-material at a reduced price on payment of immediate cash

falls in price of shares and securities, purchasing at favorable price.

• Co%"en(at!ng Ba#ance=Co%"en(at!+e 7ot!+e(

cash balance that a firm must maintain with a bank to compensate the bank for

services rendered or for granting a loan. #irm often maintains bank balance in e'cess

of transactions needs as a means of compensating for the various services. hese

balance are called compensating balance. 4ank provides various services to the firm

like@ payment of check information of credit, loan etc.

Aut of the four motives for holding cash, the most important ones are the transaction

motive and the compensation motive. his is because precautionary balance can be

met by short-term borrowings and business firms normally do not speculate and thus

doesn5t re"uire speculative balances.

$.$.1 Ca(h Con+er(!on Cc#e

Cash Conversion Cycle, also known as asset conversion cycle, net operating cycle or

/ust cash cycle, is a ratio used in the financial analysis of a business. he higher the

number, the longer a firm5s money is tied up in operations of the business and

unavailable for other activities such as investing. he cash conversion cycle is the

number of days between purchasing raw materials and receiving the cash from the sale

of the goods made from that raw material.

1+



Cash conversion cycle K verage stockholding period 9in days: N verage receivables

processing period 9in days:

(here,

verage stockholding period 9in days: K closing stock L average daily purchases.

verage receivables processing period 9in days: K account receivables L average daily

credit sales.

verage payable processing period 9in days: K accounts payable L average daily credit

purchases.

he duration between the purchase of a firm5s inventory and the collection of accounts

receivable for the sale of that inventory, also known as cash cycle.

Cash Conversion Cycle K Inventory 8rocessing 8eriod N ays to Collect ?eceivables

$.$.1/ Cred!t 7anage%ent

Credit policy can have significant influences on sales. In theory, the firm should lower

its "uality standard for accounts accepted as long as the profitability of sales generated

e'ceeds the added costs of receivable is determined by the volume of credit sales and

the average period between sales and collection.

#irm5s ob/ective of credit management is not only to collect receivable promptly, but

also to give an outlook to the benefit cost trade off involve in various aspects of

accounts receivable management. he important criteria to maintain benefit cost trade

off the firm5s receivable management are to set up credit policies. firm5s policy

provides guidelines for determining whether to e'pand credit to a customer and how

much credit should be given to the customer. Collection policies decision includesthree dimensions.

Cred!t Standard(

• $ales revenue

• Investment in account receivable

• 4ad debt e'penses

10



Cred!t ter%(

• Cash discounts

• Cash discount period

• Credit period

Co##ect!on Po#!c!e(

• Correspondence

• elephone calls

• 8ersonal visits

• <egal action

$.$.10 Ca(h '#o6

Cash flow simply refers to the flow of cash into and out of a business over a period oftime. (atching the cash inflows and outflows is one of the ma/or management tasks of

an owner. he outflow of cash is measured by those che"ues of transaction that will

write every month to pay salaries, suppliers, and creditors. he inflows are the cash,

which receive from customers, lenders and investors. 8ositive cash flow means the

cash coming in% to the business is more than the cash going “out% of the business@ the

company has a positive cash flow. positive cash flow is very good and the only

worry here is what to do with the e'cess cash. *egative cash flow means the cash

going “out% of the business is more than the cash coming “in% to the business@ the

company has a negative cash flow. negative cash flow can be caused by a number of

reasons. #or e'ample; too much or obsolete inventory or poor collections of accounts

receivable can be the cause of short of cash. If the company can5t borrow additional

cash at this point, the company may be in serious trouble.

cash flow statement is typically divided into three components. hese are stated

follows;

O"erat!ng Ca(h '#o6

2D



Aperating cash flow, often referred to as working capital, is the cash flow generated

from internal operations. It is the cash generated from sales of the product or service of

business. It is the real lifeblood of business, and because it is generated internally, it is

under our control.

'!nanc!ng Ca(h '#o6

#inancing cash flow is the cash that flows to and from e'ternal sources@ such as

lenders, investors and shareholders. new loan, the repayment of a loan, the issuance

of stock and the payment of dividend are some of the activities that would be included

in this section of the cash flow statement.

$.$.12 Ca(h '#o6 Pro*ect!on

cash flow pro/ection is a forecast of the difference between cash coming “in% the

business and cash going “out% from the business. he estimation or pro/ection cash

flow is a powerful cash management tool for a business. If we were to choose one

financial management tool that we use on a routine basis, the cash flow pro/ection andcash flow analysis would be the one to choose.

4y knowing cash position now and n the future, we can;

• >ake sure business have enough cash to purchase sufficient inventory for

seasonal cycles@

• ake advantage of discounts and special purchase@

• 8roperly plan e"uipment purchases for replacement or e'pansion@

• 8repare for ade"uate future financing and determine the types of financing

9short-term credit line, permanent working capital, or long-term debt:.

• Impress lenders with ability to plan and repay financing.

>oreover, it /ust makes good business sense to know where you are and where you are

going with your company. cash flow pro/ection can help to do this. #or a new or

growing business, the cash glow pro/ection can make the difference between success

and failure. #or an ongoing business, it can make the difference between growth and

stagnation. he cash flow pro/ection shows how cash will flow in and out of the

2&



business and enables firms to budget the cash needs of the business over a period of

time. he ability to predict and plan cash outlays means that firms won5t be forces to

resort to une'pected borrowing to meet your cash needs. he lack of li"uidity can be a

killer-even for profitable business. <ack of profits won5t kill a business nearly as

"uickly as the lack of cash to pay your trade creditors. ?emember, non-cash e'penses

such as depreciation can make your profit look negative, while your cash flow is

positive. nd you could also be showing a profit but have negative cash flow. hat5s

why it is essential that we understand how to use a cash flow statement, and use it on

regular basis. 8reparing a cash flow pro/ection is a something like preparing budget

and balancing checkbook at the same time. 7nlike the income statement, a cash flow

statement deals only with actual cash transactions. epreciation, a non cash

transaction, does not appear on a cash flow statement. <oan payments 9both principal

and interest: will appear on your cash flow statement since they re"uire the outlay of

cash.

Cash is generated primarily by sales. In most of the business not all sales are cashsales. Even if firm5s have a retail business and a large percentage of sales are cash it is

likely that firm offer credit 9charge accounts, term payments, lay-a-way, and trade

credit: to customers. hus, we need to have a means of estimating when those credit

sales will turn into cash-in-hand. Cash flow pro/ection should be prepared for short-

term 9weekly, monthly:, and long-term 9annual, 2-= years: planning purposes. hey are

used for deficient purposes and thus are generally prepared differently.

$.$.19 Ca(h '#o6 State%ent >C'S?

he Cash #low $tatement attempts to analyze the transactions of the firm in terms of

cash i.e. the transactions generating cash and using cash. he focus in the cash flow

statement is on cash rather than on working capital. $o, the C#$ provides a summary

of sources of cash and uses of cash in the firm. he sources of cash may be the cash

profits earned but the firm, issue of capital for cash, issue of other securities for cash,

borrowings, sale of assets or investments etc. the uses of cash may be purchase of

assets, investment, and redemption of debenture or preference share, repayment of

21



loan, payment of ta', dividend distribution etc. he e'cess of sources cash over the

uses of cash would be the increase in cash during the year and vice-a-versa. hus, the

C#$ summarizes the cash inflows and outflows.

$.& Re+!e6 of Book( and Art!c#e(=@ourna#(

In this section an attempt has been made to review some book on financial

management, which deals with the management of cash.

he well known professor (eston and 4righam have given some theoretical insightinto the cash management after their various studies on it. he bond conceptual

findings of their studies provide sound knowledge and guidance for the future studies

in the field of management. hey e'plain in the beginning, the motives for holding

cash specific advantage of ade"uate cash, synchronization of cash flows, e'pending

collection and che"ue clearing, using float, cost of cash management determining the

minimum cash balance, compensating balances overdraft system cash management,

management of account receivable credit policy, evaluating changes in credit policy.

>5e(ton @. 'red and Br!gha% Eugene 7anager!a# '!nance. 190?.

#rom the book entitled financial management5 written by >.J. Bhan and 8.B. Fain,

cash management is one of key areas of working capital management5. part from the

fact that it is the mot li"uid current assets, cash is the common denominated to which

all current assets, can be reduced because the other ma/or li"uid assets i.e., receivables

and inventory get eventually converted in cash. his underlines the significance of

cash management. >7.. han and P.. @a!n 192/?.

#or the cash management, a well Rknown Indian professor I. >. 8andey has described

some conceptual ingredients, which are based on his various research studies. (e can

learn lesson from it and helpful for this study indeed. !e has described various e'cept

of cash management which are as follows@ fact of cash management, motives for

holding cash, cash forecasting and budgeting, managing the cash flows, counting

disbursement, determinant of the optimum cash balance.

(e also received some theoretical concept on the component of cash management

from Gan !orne books. !e has categorized the various component of cash

management. hese are the functions of cash management@ managing collection,

transferring funds, concentration banking, lock-bo' system and other procedures,

22



control of cash disbursements, payroll and dividend disbursements, zero balance

account, electronic fund transfer, balancing cash and marketable securities, model for

determining optimal cash.

4a/racharya 9&00D: in his doctoral thesis, “Cash management practices in Nepalese

enterprises%, with reference to *epalese public enterprises from the year &0 to &0+

conducted research in the area of cash management on@ forecasting and planning, cash

management strategies using different models and techni"ues. he ma/or findingsdrawn that he concluded cash management practices in *epal are operated in a

traditional manner more serious aspect of cash management has been the absence of

any formalized system of cash planning and cash budgeting in many enterprises.

Foshi 91DD1:, entitled “ A study on Financial Performance of Commercials Banks%,

concluded that the li"uidity position of commercial banks is satisfactory. <ocal

commercial banks have found the higher debt e"uity ratio than other /oint venture

banks. <oans and advances have been the main form of the investment. sset

utilization for earning purposes is two-third of total assets. he main source of income

for these banks is the interest from loans and advances.

(.F 4aumol, at his article “The Transaction Demand for cash: An inventory theoretic

Approach on Suarterly /ournals of economic 9 Gol. <PG, *ov. &0=1: identifies cash

management as analogues to inventory maintenance and demonstrate that the model of

economic order "uantities that is applicable to inventory management is perfectlyapplicable in cash management too. !e has presented model in views of minimizing

the opportunity cost of holding cash and ma'imizing the return on the available funds,

the cash balance should be maintained at a minimum level and the funds not re"uired

from immediate use be invested in the marketable securities.

$imilarly, >.! >iller and Arr. ., in their article “A !odel of the Demand for money

in firms on "uarterly /ournals of economics, 9Gol <PJ, ug &006: have developed a

model known as >iller-Arr >odel, that takes into account the realistic pattern of cash

2



flows and prescribed when and how much to transfer from cash to investment account

and vice-versa.

?am >. saksena at his article, “To"ards more efficient cash management on

"uarterly /ournal of management "uality 9 Gol. *o. =, &0: identified that the term

cash management has a meaning according to the purpose for which it is used and

persons with varying branches of knowledge implies various meaning of cash.

Economics considered cash, as the means to satisfy human want, the lawyer view that

cash is the legal tender money issued by a determinate authority. !owever, our

concern of the meaning of cash is an asset constituting the most li"uid item among all

assets. 4ut to obtain cash involves cost because corporation has to rise through issue to

share or by borrowing with interest. In through generation money market procurement

is liability and wasted opportunity unless it is not put to its optimal use.

$. Re+!e6 of Pre+!ou( Re(earch

In this section of the review of thesis relating to cash management have been

considered.

Ane of these thesis report reviewed was presented by !r# Bi$ay Pradhan in %&&'(

entitled “A study of cash management of salt trading corporation )td( as partial

fulfillment of the re"uirements for the degree of master5s of business administration.

he thesis was based on the secondary data of the company for the past five years.

he ma/or finding of his study has been presented as under@

• $alt trading corporation <td could not make the best use of available cash

balance prudently.

• he cash collection efficiency in this corporation is very low.

• he collection of trade credit in the corporation is low during the three years of

the study period.

• >anagement has taken liberal credit policy to sales of goods. !ence the cash

and bank balance of the study period is minimum of account receivables.• *o optimum cash balance is maintained.

2=



>r. 4i/ay 8radhan has provided some recommendations to improve cash management.

• Efficient management of cash.

• esign effective account receivable management.

• dopt effective credit policy.

• >aintain optimum cash balance.

• 8repare cash budget.

• Invest in marketable securities.

nother thesis report reviewed was presented by !r# Naresh *un"ar( entitled +A

,tudy on -orking Capital !anagement of Pharmaceutical .ndustry of Nepal with

$pecial reference to ?oyal rug <imited5 presented as partial fulfillment for the

re"uirements of the master5s of business administration in the year 1DDD.

>a/or findings of his research work were@

• Company is following conservative working capital policy.

• It is found hat inventory holds the largest portion of current assets.

• It shows that investment in current asset is high with respect to total assets.

• he company has not been able to convert current asset "uickly in cash in order

to meet current liabilities.

• Averall return position of company is negative, not in favorable condition. It is

because of inefficient utilization of current assets, total assets and shareholder

wealth.

>r.Bunwar has provided some recommendations to improve working capital

management;

26



here must be compulsory formulation of appropriate working capital policy not only

conservative. 4esides, there should be policy to prevent the holding of e'cessive and

inade"uate current assets n the company. It should adopt modern inventory system.

daptation of standard and marginal cost techni"ues will also be a good measure in

controlling and classifying the cost as well as for identifying the responsibility centers

for the losses.

here should be proper co-operation interaction between different sales agents,

production, marketing and sales department during the planning of sales.

8ositive attitude towards risk through providing training, participation in management

etc for the managerial level employees.

charya, 91DD& /( “Deposit mo0ili1ation of commercial 0ank in Nepal# he main

ob/ective is to analyze the impact of interest rate on deposit mobilization as well as

credit ratio increase or decrease as the change in interest rate. 4esides this, the

ob/ective is to know the efficient utilization of the accumulated deposits. $he has

found that the commercial bank have not been successful in the mobilization of the

deposits collected by the commercial banks. It is because of the fact that the

commercial banks have not able to motivate and facilitate to their cents e'cept at

change in the rate of interest. he problems are to attracting the savings to the

ma'imum possible e'tent to channeling these savings into these savings into those

sectors of the economy where there are most needed and to e'tending banking

facilities in the country to unbanked areas. he changes of interest rates in loan are

also recommended. Commercial banks should e'tend long term and medium term

credit in addition to short term credit.

Foshi 91DD1:, entitled T A ,tudy on Financial Performance of Commercial Banks

“concluded that the li2uidity position of commercial 0anks is satisfactory# <ocal

commercial banks have found the higher debt e"uity ratio than other /oint venture banks.

<oans and advances have been the main form of the investment. sset utilization for

2



earning purposes is two-third of the total assets. he main source of income for these

banks is the interest from loans and advances. he profitability position of *epal rab

4ank is stronger than that of other /oint venture banks during the study period.

Ane of the latest of these sorts of dissertation was presented by !r# ,a0in Prakash

,ain$u( entitled “Cash !anagement in Nepalese Pu0lic 3nterprises( a case study of

4oyal Drugs )imited( presented as partial fulfillment for the re"uirements of the

master degree in the year 1DD2.

>a/or findings of his research work were@

• Company doesn5t have any definite policy regarding how much of cash

balance to hold each fiscal year.

• Company has not been forecasting cash balance taking into consideration

the sales volume.

•Company fails to maintain an ade"uate proportion of cash in its current

assets.

• Cross analyses revealed that company fails to collect receivables from its

sundry debtors timely.

• Company has not been precisely meeting its current liabilities payment.

>r. $ain/u has provided some recommendations to improve cash management

system of ?oyal rugs <imited@

• >aintain optimum cash balance every year.

• 8repare trial balance.

• 8repare cash budget on the basis of cash flow analysis.

• 8repare cash flow statements.

• etermine minimum level of cash balance to hold every year, maintain

such minimum level of cash balance as a re"uirement of precautionary,

speculative and compensation motive, besides for daily transactions.

2+



• 7se e'tensively financial and statistical tools as per re"uired.

charya 91DD:, entitled, TCash !anagement Practices of !anufacturing Companies

of Nepal5( e'plained the findings in his studies as follows; #rom the result of structure

and position of cash, cash-management practice, utilization of cash, and cash turnover

ratio 9higher:, non-government sector is far more efficient than the government sector.

$ubse"uently, the average collection period 9C8: is lower for the government

manufacturing enterprises in comparison to non- government ones, whereas the cash

conversion cycle is, conversely, in favor of the non-government manufacturing

enterprises. he study has also discerned that the e'cess reserves of organizations form

both end of the spectrum haven’t invested their e'cess reserves in short term

marketable securities. he ultimate finding e'plains that manufacturing companies in

aggregate are operating under loss.

$ain/u 91DD:, entitled, 5Cash !anagement in Pu0lic !anufacturing 3nterprises of

Nepal6 A Case ,tudy of 4oyal Drugs )imited5( he e'plains conclusively that ?<‟s

cash management is very poor. $tudy of cash flow statement of ?<, points out their

financing activities as passive incurring neither cash flows nor outflows. #inancial

activities have greater impact on the profitability of the firm and subse"uently on

li"uidity. 4esides for daily course of business transactions, as a re"uirement under

precautionary, speculative and compensatory motive, a firm should hold certain

minimum level of cash balance to meet them. 8oor cash management in ?< counts

for inefficient or poor use of financial and statistical tools. Cash flow statements are

missing and cash budgets are not prepared on cash flow analysis. Gariables held under

the different headings are a haphazard guesswork. *egative profitability of the firm

augments the worsening financial position of the firm. !e goes on to add, that

disappointing down falling trend of the financial position is indicative of the fact that

?< should immediately seek for drastic change in its managerial structure

20



8radhan 91DD+:, entitled 5A ,tudy on Cash !anagement of ,alt Trading Corporation

)td(5 finds the cash management of the studied corporation to be ineffective. !e further

states that the organization sells goods both in cash and credit depending upon the

creditor5s situation of time and the nature of goods. $alt trading corporation ltd. derives

most of its cash from sales of goods and loans from banks. Ather sources include

miscellaneous incomes like interest commission, dividend and sales of fi'ed assets.

Corporation uses much cash for purchase of commodities, paid bonus, interest, income

ta', purchase of fi'ed assets, selling e'penses, etc. thus e'plaining the transaction motive

of the corporation to hold cash. !e finds that the cash collection efficiency in this

corporation is very low along with the collection of trade credit. *o optimum cash

balance is maintained. he cash and bank balance with respect to current assets has been

in a fluctuating trend, similarly to total assets.

$. Re(earch a"

Cash management is such a delicate topic for financial, manufacturing or for that

matter service organizations and any other type of firm or enterprise. Cash influences

and permeates every aspect of operation of a business. Cash can be and has been

compared akin to life blood of any business. stute management of cash can lead to

obvious profits but much more pertinently to growth@ as stated earlier, with cash

permeation effecting upon most aspect, and usually daily operation of business, the

e'plicit and implicit repercussions are visible almost immediately.

In process of searching and evaluating previous dissertations and theses regarding this

topic, this student came upon some pretty interesting ones, some pertinent others mere

references. Cash management researches conducted on performances of public

manufacturing enterprises was few, but theses with direct reference to financial

institutions conducting their cash management operations were not found.

D



CHAPTER- III

RESEARCH 7ETHODOO

Introduct!on

?esearch methodology can be defined as systematic process that is adopted by the

research in studying problem with certain ob/ectives. ?esearch is effort of search new

fact, knowledge and principle in scientific ways. o generate knowledge, investigation

or en"uiry in the phenomenon of the e'plored or une'plored area necessitated the

research work. he research re"uires different methodologies, tools, techni"ues, etc.

he main purpose of this chapter is to focus on different research method and

conditions, which are used while conducting this study. Every study needs a systematic

methodology to show the better results of the research. his chapter contains research

design, source of data, population and e'amples, method of data collection.

&.1 Re(earch De(!gn

?esearch design is a plan that shows how researchers intend to fulfill the goal of

purposed study. he plan mean now researcher investigator collect the data structure in

term controlling the data in term of money and time.T he plan mean now researcher

investigators collect the data structure in term controlling the data in term of money

and time. (e can say that the research design is specific action of methods and

procedures for ac"uiring the information needed. It is the plan, structure and strategy

of investigation conceived so as to obtain answer to research "uestions and to control@variances. It is the overall operational pattern of framework of the pro/ects that

&



stipulates what information is to be collected from which sources by what purpose.

good design will ensure that the information obtained is relevant to the research

"uestion and that it was collected by ob/ective and economically procedure. he

research analyzes the financial performance of commercial banks in *epal and

provides valuable recommendation. his will follow analytical and descriptive

research design. ifferent financial tools have been used to analyze and find out

needed result.

&.$ Source of Data

here are two sources of data, primary and secondary. 4ut only secondary data has

been used in this search.

Secondar Source8

his refers to data that are already used and gathered by others. $econdary data are

mostly used for this research purpose. $o the ma/or sources of secondary data are as

follows;

• nnual general report of *epal $4I 4ank <td from 1D6L6= to 1D6+L60

• *ational newspaper, /ournals, magazine, and reports for Central <ibrary of

. 7. <ibrary of $hankar ev Campus.

• Internet and various website

&.& Po"u#at!on F Sa%"#e

ll a commercial banks currently operation in *epal is the population. An the basis of

the researcher)s /udgment, the study will cover only & sample out of all the banks, viz.

*epal $4I 4ank <td.

&. 7ethod of Data Ana#(!(

o make the study more specific and reliable, the researcher uses two types of tool for

analysis,

a? #inancial ools

1



)? $tatistical ools

&..1 '!nanc!a# too#(

o find out the true picture of cash management of *epal $4I 4ank <td, ?esearcher

has used financial tools, techni"ues and variables. hese are as follows;

&..1.1 Rat!o Ana#(!(

?atio analysis is a widely used tool of financial analysis. large number of ratios can

be generated from the components of profit and loss account and balance sheet. It is a

powerful tool of financial analysis. It helps to summarize the large "uantities of

financial data and to make "uantitative /udgments about the firm5s financial

performance. hey are sound reasons for selecting different kinds of ratios for different

types of situations. #or this study, ratios are categorized into the following ma/or

headings;

A. !;u!d!t Rat!o(

<i"uidity refers to the ability of a firm to meet its short- term or current obligations. $o

li"uidity ratios are used to measure the ability of a firm to meet its short-term

obligations and from them the present cash solvency as well as ability to remain

solvent in the event of adversities of the same can be e'amined 9Gan !orne,

&000;602:.

Inade"uate li"uidity can lead to une'pected cash short falls that must be covered at

inordinate costs, thus reducing profitability. In the worst case, inade"uate li"uidity can

lead to the li"uidity insolvency of the institution. An the other hand, e'cessive li"uidity

can lead to low asset yields and contribute to poor earnings performance. 9$cott,

&001;&D:. o find -out the ability of bank to meet their short-term obligations, which

are likely to mature in the short period, these ratios

he types of li"uidity used in this study are as follows;

• Current Rat!o

Current ratio 7 Current Assets

2



Current lia0ilities

• Ca(h and Bank Ba#ance to Current A((et Rat!o

Cash 8 Bank Balance to Current Assets 4atio 7 Cash 8 Bank Balance

Current Assets

• Ca(h and Bank Ba#ance to Tota# De"o(!t Rat!o>Ca(h Re(er+e Rat!o?

Cash 4eserve 4atio7 Cash and Bank Balance Total Deposits

• Ca(h and Bank Ba#ance to '!Ged De"o(!t

Cash 8 Bank Balance to Current Assets 4atio 7 Cash 8 Bank Balance

Fi9ed Deposit

B. Act!+!t Rat!o( = Turno+er Rat!o(

he fund of creditors and owners are invested in various assets to generate income and

profit. 4etter the management of assets, the larger the amount of income. ctivity ratio

measures the degree of effectiveness in use of resources of fund by an entrepreneur. It

is also known as turnover ratio because they indicate the number of times the assets are

being converted or turnover into income. In other words turnover ratios also known as

utilization ratio or activity ratios are employed to evaluate he efficiency with which the

firm manages and utilizes its assets. hey measure how effectively the firm uses

investment and economic resources at its command. !igh ratio depicts the managerial

efficiency in utilizing the resources. hey show the sound profitability position of the

bank. <ow ratio is the result of insufficient utilization of resources. !owever, too high

ratio is also not good enough as it may be due to the sufficient li"uidity. epending

upon special nature of assets and sales of the banks, following ratios are tested.

oan( and Ad+ance( to '!Ged De"o(!t Rat!o

)oan 8 Advances to Fi9ed Deposit 7 )oan and Advances Fi9ed Deposits



oan( and Ad+ance( to Sa+!ng De"o(!t Rat!o(

)oan 8 Advances to saving Deposit 4atio 7 )oan 8 advances

,aving deposits

oan and Ad+ance( to Tota# De"o(!t( Rat!o

)oan 8 Advances to Total Deposit 4atio 7 loan 8 advances

Total deposits

C. Prof!ta)!#!t Rat!o

company should earn profits to survive and grow over a long period of time. It is a

fact that sufficient profit must be earned to sustain the operation of the business@ to be

able to obtain funds from investors for e'pansion and growth@ and to contribute

towards the social overheads for the welfare of the society. he profitability ratios are

calculated to measure the operating efficiency of the company. >anagement of the

company, creditors and owners are interested in the profitability of the firm. Creditors

want to get interest and repayment of principal regularly. Awners want to get a

reasonable return from their investment. 8rofitability ratios are calculated to measure

the operating efficiency of the company. Garious profitability ratios are calculated to

measure operating efficiency of the business enterprises. hough profitability ratios the

lender and investors want to decide whether to invest in particular business or not. o

meet the ob/ective of the study, following ratios are calculated in this group.

• Return on Tota# A((et

4eturn on Assets 7 Net Profit after Ta9 NPAT/

Total Assets

=



• Return on Shareho#der<( E;u!t >Net 5orth?

4eturn on ,hareholder;s e2uity7 Net profit After Ta9

32uity capital

• Intere(t Earned to Tota# A((et Rat!o

.nterest earned to Total Assets 7 .nterest earned

Total Assets

• Return on Tota# De"o(!t Rat!o

Net Profit to Total Deposit 7 Net profit

Total Deposit

&..$ Stat!(t!ca# Too#(

$tatistical tools help to find out the trends of financial position of the bank. It alsoanalyzes the relationship between variables and helps banks to make appropriate

investment policy regarding to profit ma'imization and deposit collection, fund

utilization through providing loan advances or investment on other companies.

?anges of statistical tools are also used to analyze the collected data and to achieve the

ob/ectives of the study. $imple analytical tool such as Barl 8earson5s coefficient of

correlation is adopted which are as follows;

&..$.1 Trend ana#(!(

rend analysis is a very useful and commonly applied tool to forecast the future event

in "uantitative term on the basis of the tendencies in the dependent variable in the past

period. $traight line trend implies that irrespective of the seasonal, cyclic and irregular

fluctuation the trend value increases or decreases by absolute amount per unit of time.

he linear trend values form a series in arithmetic progression.

>athematically,

6



JKaNb'

(here JKvalue of dependent variable

a K J- intercept

b K slope of the trend line

P K value of the independent variable i.e. time

*ormal e"uations fitting above are

∑ ∑+= < 0 Na=

∑ ∑∑ += 1 < 0 < a <=

$ince D=∑ <

a K JL*

b K PJL P1

&..$.$ Ar!th%et!c 7ean

n average is a single value selected from a group of values to represent them in same

way, which is suppose to stand for whole group of which it is a part, as typical of all the

values in the group 9(augh .E:. “rithmetic >ean is statistical constants which

enables us to comprehend in a single effort of the whole.T 4owley, 1DDD;2= /# Aut of

various measures of the central tendency, arithmetic mean is one of the useful tools

applicable here. It represents the entire data by a single value. It provides the gist and

gives the bird)s eye view of the huge mass of unwieldy numerical data. It is easy to

calculate and understand and based on all observation. rithmetic mean of a given set

of observation is their sum divided by the number of observation. In general if P&, P1,

P2---------------Pn are the given observations, then arithmetic mean usually denoted by

P is given



&..$.& Standard De+!at!on >S.D.?

verage like other mean, mode and medium gives us the idea of concentration of the

items around the central part of distribution. 4ut average do not gives clear picture about

the distribution because two distributions with same average may differ in the scatter ness

of the items from the central value. o remove this drawback, dispersion is used.ispersion is defined as the measure of variation of the item from the central value.

mong various measure of dispersion, standard deviation is widely used. $tandard

deviation is absolute measure of dispersion, which is defined as the positive s"uare root

of the mean of the s"uare of deviation taken from the arithmetic means, if P&, P1,

P2--------Pn are the given observation, then standard deviation denoted by is given

by@

, *K number of observation in series P

K $um of observation in series P

K $um of $"uared observation in series P

$tandard deviation is the absolute measure of dispersion. he relative measure of

dispersion based on the standard deviation is known as the coefficient of standard

deviation

&..$. Coeff!c!ent of ,ar!at!on >C.,.?

Coefficient of variation is the relative measure of dispersion, comparable across

distribution, which is defined as the ratio, of the standard deviation the mean e'press in

percent 9?ichard ?ubin, &00, pg &&:. It is used in such problem where we want to

compare the variation which is greater and is said to be more variable or conversely less

+



consistent, less uniform, less stable or less homogeneous. An the other hand, the series

for which co-efficient of variation is less and is said to be loss variable or more

consistent, more uniform and more stable or more homogenous.

he coefficient of variation is given by,

(here,

C.G. K Co-efficient of variation

K rithmetic mean

U K $tandard deviation

&. D!agra%%at!c and ra"h!ca# Re"re(entat!on

iagrams and graph are visual aids that give a bird5s eye view of a given set of

numerical data. hey present the data in simple and readily comprehensive form.

iagrams are primarily used for comparative studies and can5t be used to study the

relationship between the variable under study. hat is done through graphs.

&./ Data Co##ect!on Techn!;ue(

he secondary data has been collected from annual report of *epal $4I 4ank. his

study is based on secondary sources of data and the annual financial statements have

been collected from the fiscal year 1D6L6= to 1D6+L60. Ather related data are also

collected and used in this thesis.

&.0 Data Proce((!ng "rocedure

he data analysis tools are applied as simple as possible. ata obtained from various

sources cannot directly be used in their original form. hey need to further verify and

simplify the data for the purpose of analysis. ata, information, figures and facts

obtained need to be checked, rechecked, edited and tabulated for computation.

0



!omogeneous data have been sorted in one table and similarly various tables have

been prepared in understandable manner, odd data are e'cluded from the table. ata

have been analyzed and interpreted using financial and statistical tools.

&.2 Per!od Co+ered

his study covers a period of four year from #J 1D6L6= to #J 1D6+L60 of *epal $4I

4ank <td. this analysis is done on the basis of data covering five years

CHAPTER- I,

DATA PRESENATATION AND ANASIS

In this chapter, all the efforts have been made to analyze and present the

collected data from the various sources. his chapter is the main part of the

study because in this chapter collected data are presented and analyzed with the

help of various financial and statistical tools, tables, graphs etc meaningfully and

clearly.

.1 De"o(!t Categor!3at!on of Ne"a# SBI Bank td.

.1.1 Intere(t Bear!ng De"o(!t

Ta)#e .1

Intere(t Bear!ng De"o(!t

9?s in >illion:

ear

Intere(t )ear!ng De"o(!t

ro6th ro6th

Current earPre+!ou(

ear

1D6L6= &&+=.+== 0&6.+D 12.0+= 1=.+00

1D6=L66 10D=.062 &&+=.+== &2D=&.&D+ &&D.D0D

1D66L6 2&0&&.=+ 10D=.062 DD=.0= 1+.&1

1D6L6+ 2+DD0.+6+ 2&0&&.=+ 6D0+.&D &0.&&D

1D6+L60 01=.12D 2+DD0.+6+ &&1.261 10.=+1

=D



$ources; ppendi'-CL.&.&

In the above table, we can see that the interest bearing deposit of the *epal $4I 4ank

has mi'ed growth rate from the year 1D6L1D6= to 1D6+L1D60. In 1D6=L66 bank

succeed to get high interest bearing deposit of &&D.D0DV whereas in 1D6L1D6+ banks

interest bearing deposit decreased by &0.&&DV.

#ig no; &

.1.$ Sa+!ng De"o(!t

Ta)#e .$

Sa+!ng De"o(!t

9?s in >illion:

ear

Sa+!ng De"o(!t

ro6th ro6thCurrent ear

Pre+!ou(

ear

1D6L6= &&.&= 21.60D +06.+= 1.26

1D6=L66 =+11.102 &&.&= &6=&.&&+ 20.=+

1D66L6 1=0.060 =+11.102 &2.66 1.601

=&



1D6L6+ +D0.11 1=0.060 +&0.12 &&.1+

1D6+L60 &D2.=+2 +D0.11 116=.2& 1+.D20

$ources; ppendi'-CL.&.1

In the above table, we can see that the saving deposit of *epal $4I 4ank has mi'ed

growth rate. In the year 1D6=L66 the bank has highest saving growth i.e. 20.=+ V. In

the year 1D6L6+ it decreases to &&.1+V. he saving deposit is also one of the

interests bearing deposit of the bank. ?ate of growth of deposit was in decreasing rate

in the year 1D66L6 and 6L6+ which is not a good sign for the bank.

#ig no; 1

.1.& '!Ged De"o(!t

Ta)#e .&

'!Ged De"o(!t

9?s in >illion:

'!Ged De"o(!t

ro6th ro6thCurrent ear Pre+!ou( ear

1D6L6= 6+=.++ ==&.66 &22.&+ 1.120

=1



1D6=L66 &2+.0 6+=.++ &D=+2.6&D &=.20=

1D66L6 11&+.0+ &2+.0 &D.= 1.D&&

1D6L6+ 1+D&2.==D 11&+.0+ =+6.6D1 16.+

1D6+L60 261D+.6=D 1+D&2.==D +&0=.&DD 10.1=


he above table shows that the fi'ed deposit was in #luctuating trend in the growth

rate. !owever bank succeeds to make more than double deposit than before year in

1D6=L1D66 #iscal year. In the ne't two years fi'ed deposit of the bank is decreased

rate.

#ig no; 2

.1. Ca## De"o(!t

Ta)#e .

Ca## De"o(!t

9?s in >illion:

ear

Ca## De"o(!t

ro6th ro6thCurrent ear

Pre+!ou(

ear

1D6L6= +1+.0= 61.&2 1D.D+1 21.66+

=2



1D6=L66 &6=.16 +1+.0= +&6.60 0+.=&1

1D66L6 1&2.=D &6=.16 6+.16 6.606

1D6L6+ &0&.D 1&2.=D -06.66 -1D.=D

1D6+L60 1DD.00 &0&.D +2.012 40.891

$ources; ppendi'-CL.&.

#rom the above table we can see that the position of the call deposit in the *epal $4I

bank was good in 1D6=L66.Call deposit hugely declined in 1D66L6 by 6.606V and in

the year 1D6L6+ it declined to -1D.=DV which was not good for the bank.

#ig no;

.1. Non- Intere(t Bear!ng De"o(!t

Ta)#e .

Non- Intere(t Bear!ng De"o(!t

9?s in >illion:

ear

Non- Intere(t Bear!ng

De"o(!tro6th ro6th

Current

ear

Pre+!ou(

ear1D6L6= &+6D.=20 1D1+.&= -&6.+6 -+.16

=



1D6=L66 2D=&.1= &+6D.=20 &&0D.&+ 62.000

1D66L6 10+.06= 2D=&.1= -66.101 -1.&2

1D6L6+ D=.= 10+.06= &1D.6D0 .=01

1D6+L60 D+2.D22 D=.= -211.=& -.21&

$ources; ppendi'-CL.&.=

In the above table, we can say that the non-interest bearing deposit was not good in the

year 1D6L6=. he non-interest bearing deposit was in fluctuating rate through out the

whole year.

#ig no; =

.1./ Current De"o(!t

Ta)#e ./ Current De"o(!t

9?s in >illion:

earCurrent De"o(!t


1D6L6= &2+.&D& &02D.21 -&01.22& -0.062

1D6=L66 1+6.22 &2+.&D& &&16.621 6.+1D

1D66L6 1+6&.+ 1+6.22 -1.+=6 -D.&DD

1D6L6+ 1=0.&= 1+6&.+ &20.=2+ +.+22

==



1D6+L60 2.+=+ 1=0.&= -+&.== -&&.2D6


In the above table, we can say that the current deposit was not good for the bank in the

year 1D6L6=. he bank has highest current deposit growth rate i.e. 6.+1DV in the

year 1D6=L66. In the remaining three years current deposit decreased in the fluctuating

rate.

#ig no;6

.1.0 7arg!n De"o(!t

Ta)#e .0

7arg!n De"o(!t 9?s in >illion:

ear7arg!n De"o(!t


1D6L6= &11.2+ 0.0+1 1.=6 1.06D

1D6=L66 &+6.=1 &11.2+ 6.D+6 =1.21

1D66L6 &12.D+ &+6.=1 -62.2 -2.D&D

1D6L6+ &6.&=+ &12.D+ 12.D& &+.

=6



1D6+L60 2D=.& &6.&=+ &=0.D&6 &D+.0

$ources; ppendi'-CL.&.

In the above table, we can see that the >argin deposit of the *epal $4I 4ank has

mi'ed growth rate from the year 1D6L1D6= to 1D6+L1D60. In the current year 1D6+L60

bank succeed to get high >argin deposit of &D+.0V whereas in 1D66L1D6 banks

interest bearing deposit decreased by -2.D&DV.

#ig no;

.1.2 Tota# De"o(!t

otal epositK otal Interest 4earing eposit N otal *on-Interest 4earing eposit

Ta)#e .2

Tota# De"o(!t

9?s in >illion:

earTota# De"o(!t

ro6th

ro6thCurrent ear Pre+!ou( ear

1D6L6=&2&=.20 &&=.1+6 11D.&D+ &0.+2

1D6=L6610=.110 &2&=.20 &1&.+2= &D2.+2+

1D66L62+06.1 10=.110 6020.&0= 1.+1&

=



.$.1 !;u!d!t Rat!o

satisfactory li"uidity positions is one of the distinguishing characteristics of a sound

bank. s a critical factor of evaluation, li"uidity is the ability of a bank to satisfy the

credit needs of the community, to meet demands for deposit, withdrawals, pay

maturing obligations on time, and to convert non-cash assets into )cash) to satisfy

immediate needs without loss to bank and conse"uent impact in the long-term

profitability. <i"uidity ratios such as cash and bank balance to current assets ratio,

loans and advances to current assets ratio, fi'ed deposit to total deposit ratio, saving

deposit to total deposit ratio, and investment in government securities to current

assets ratio attempts to figure out the li"uidity position of the banks under study.

.$.1.1 Current Rat!o

he current ratio one of the most commonly cited financial ratio, measures the firm5s

ability to meet its short term obligations. Current liabilities includes the sum of

borrowings, current and call deposit liability, 4ills payables, proposed dividend andother liabilities. Current assets include the cash balance, balance with *?4, money at

call and short notice, loans, advances and bills purchase and other assets. It is

e'pressed as follows

Current Rat!o

Current ratio 7 Current Assets

Current lia0ilities

Ta)#e8 .9 Current Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

Current ssets Current <iabilities ?atio

1D6L1D6= &D21.=11 2D=. 1.12

1D6=L1D66 =262.202 =261.D0 &.DDD

1D66L1D6 26.=60 ==+.=2 &.21+

1D6L1D6+ 006.2=D 61D.1+ &.==1

1D6+L1D60 06.22& +61.D2 &.&D&>ean &.+&

=0



$. D.=D+

C.G 2.21&

$ources; ppendi'-4 ppendi'-CL.1.&.&

he above table shows that the current assets, current liabilities and current ratio of

*epal $4I 4ank <imited. In the #J 1D6L6=, the bank5s current ratio stands is highest

at 1.12. $imilarly the current ratio stands at &.DD, &.21+, &.==1 &.&D& in the later

years i.e. in 1D6=L66, 1D66L6, 1D6L6+ 1D6L1D60 respectively. he ratio seems

decreasing in #J 1D6=L66 and 1D66L6 again slightly increases in the 1D6L6+ year.

hough the ratio is fluctuating and is below the standard i.e. 1;&, it seems that bank is

still able to meet its short term obligation. he table shows the average of current ratio

for the period to be &.+&. he standard deviation of D.=D+

#ig no; 0

.$.1.$ Ca(h F Bank Ba#ance to Current A((et( Rat!o

he Cash 4ank 4alance to Current ssets ?atio measures the portion of cash

bank balances maintained against its current assets. In order to analyze and

interpret the cash and bank balance to current assets position of the sampled

bank, researcher obtained the re"uired data from the bank. nd the results of the

analysis have been presented in the table no. .&D

6D



Cash 8 Bank 0alanceCurrent assets

Ta)#e .1:

Ca(h F Bank Ba#ance to Current A((et( Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

Cash 4ank 4alance Current ssets ?atio

1D6L1D6= &21.06D &D21.=11 D.&10

1D6=L1D66 &0D2.0D6 =262.202 D.2==

1D66L1D6 2&.16& 26.=60 D.6

1D6L1D6+ +.+16 006.2=D D.0D

1D6+L1D60 ==D+.2+1 06.22& D.=&

>ean D.D1

$. D.2DC.G 6.2&1

$ources; ppendi'-4 ppendi' CL.1.&.1

he above table shows that the Cash and bank balance to current assets ratio and the

percentage shows that how much of current assets of the bank represent cash and bank

balance. In the above five years the ratio increases from D.&10V to D.=&V, which

reflects good improvement during the period.

6&



#ig no; &D

.$.1.& Ca(h and Bank Ba#ance to Tota# De"o(!t Rat!o

he ratio shows the proportion of total deposits held at most li"uid assets. he ratio

computed by dividing the cash and bank balance by total deposits.

Cash and Bank 0alance to Total Deposit 4atio7 Cash 8 Bank 0alance

Total deposit

Ta)#e8 .11

Ca(h and Bank Ba#ance to Tota# De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

Cash 4ank 4alance otal eposit ?atio

1D6L1D6= &21.06D &2&=.20= D.D0+

1D6=L1D66 &0D2.0D6 10=.11& D.D6+

1D66L1D6 2&.16& 2+06.1 D.D00

1D6L1D6+ +.+16 1&=.2 D.&&=

1D6+L1D60 ==D+.2+1 =222.16 D.&D2

>ean D.D0$. D.D&

61



C.G &.06

$ources; ppendi'-4 ppendi' CL.1.&.2

he cash and bank balance to total deposit ratio reveals that the ability of banks to

cover its short term deposits. he ratio decreases in the 1D6=L66 year and again

increases rapidly in ne't two year i.e. #J 1D66L6 and #J 1D6L6+ which implies the

bank5s have sufficient cash but has maintain balances with increase in total deposit.

he average of the ratio and standard deviation are D.D0 and D.D& respectively.

#ig no; &&

.$.1. Ca(h and Bank Ba#ance to '!Ged De"o(!t Rat!o

his ratio measures the ability of the banks to meet its immediate obligation. he ratiois computed by dividing the Cash and bank to fi'ed deposit, it is e'press

Cash and Bank 0alance to Total Deposit 4atio7 Cash 8 Bank 0alance

Fi9ed deposit

62



Ta)#e8 .1$

Ca(h and Bank Ba#ance to '!Ged De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

Cash 4ank 4alance #i'ed deposit ?atio

1D6L1D6= &21.06D 6+=.++ D.&06

1D6=L1D66 &0D2.0D6 &2+.D= D.&D01D66L1D6 2&.16& 11&+.0+ D.&==

1D6L1D6+ +.+16 1+D&2.==D D.&

1D6+L1D60 ==D+.2+1 261D+.6=D D.&=1

>ean D.&=

$. D.D1+

C.G &.06

$ources; ppendi' 4 ppendi'-CL.1.&.

he above table shows that the Cash and bank balance to fi'ed deposit. he ratio

decreases in the 1D6=L66 year and again increases rapidly in ne't two year i.e. #J

1D66L6 and #J 1D6L6+.In the last year it decrease to D.&=1V.he average of the ratio

and standard deviation are D.&= and D.D1+ respectively.

#ig no; &1

6



.$.$ Eff!c!enc= Act!+!t= Turno+er Rat!o(;

It is known as turnover or efficiency ratio or assets management ratio. It measures how

efficiently the firm employs the assets. urnover means@ how much number of times

the assets flow through a firm)s operations and into sales. his ratio measures the degree

of effectiveness in use of resources or funds by a firm. 3reater rate of turnover or

conversion indicates more efficiency of a firm in managing and utilizing its

assets, being other things e"ual. Garious ratios are e'amined under this heading.

.$.$.1 oan and Ad+ance( to '!Ged De"o(!t Rat!o

<oan and advances clearly state that it is the assets of the bank and fi'ed

deposit is the liability. #i'ed deposit are interest bearing long term obligation where

as loans and advance are the ma/or sources in generating income for commercial banks.

his helps to show the ratio of <oan advances to fi'ed deposit. (e can also

conclude that what part of the loan and advances is initiated against fi'ed

deposit.

)oan 8 Advances to Fi9ed Deposit 7 )oan and Advances

Fi9ed Deposits

Ta)#e8 .1&

oan and Ad+ance( to '!Ged De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

loans and advance #i'ed eposit ?atio

1D6L1D6= &1&&2.60+ 6+=.++ &.6

1D6=L1D66 &=&2&.+ &2+.D= D.+6+

1D66L1D6 &+D.=+ 11&+.0+ D.+0

1D6L1D6+ 1&26=.& 1+D&2.==D D.62

1D6+L1D60 16&1.D0 261D+.6=D D.11

>ean D.0+1

$. D.20=

C.G D.12$ources; ppendi'-CL.1.1.&

6=



he above table shows the loans and advances to fi'ed deposit of the bank for four

fiscal years. It reveals the proportion of loans mobilized in terms of its fi'ed deposits.

he ratio seems to be in decreasing trend during the study from #J 1D6L6= to

1D6+L60. he average of the ratio accounts at D.0+1 times. he ratio of the period has

been revealed by its standard deviation i.e. D.20

#ig no; &2

.$.$.$ oan and Ad+ance( to Sa+!ng De"o(!t Rat!o

$aving deposits are interest bearing obligation for short term purpose where as loan and

advances are long term investment for generating income. $o the ratio indicates how

money time5s short term interest bearing deposits are utilized for income generating

purpose. It is calculated as;

)oan 8 Advances to saving Deposit 4atio 7 )oan 8 advances

,aving deposit

Ta)#e8 .1

66



oan and Ad+ance( to Sa+!ng De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

<oans and dvance $aving eposit ?atio

1D6L1D6= &1&&2.60+ &&.&6 1.0D

1D6=L1D66 &=&2&.+ =+11.10 1.=00

1D66L1D6 &+D.=+ 2+.0D 1.20

1D6L1D6+ 1&26=.& +D0.1 1.6=

1D6+L1D60 16&1.D0 &D2.=+2 1.=1

>ean 1.6&&

$. D.&1

C.G 6.=++

$ources; ppendi'-CL.1.1.1

he above table shows the loans and advances to saving deposit of the bank for four

fiscal years. It reveals the proportion of loans mobilized in terms of its saving deposits.

he ratio seems in increasing and decreasing trend during the entire study period

standing at 1.0D, 1.=00, 1.20, 1.6= 1.=1 times. he average of the ratio accounts

at 1.6&& times. he increment in the ratio of the period has been revealed by its

standard deviation i.e. D.&1V.

#ig no; &

6



.$.$.& oan and Ad+ance( to Tota# De"o(!t Rat!o

his ratio is calculated to find out the banks are successful utilizing the outsiders fund

.i.e. total deposits for profit generating purpose in the form of e'tending loan and

advances. !igher ratio shows higher efficiency to the utilization of outsider5s fund. It is

calculated as follows;

)oan 8 Advances to Total Deposit 4atio 7 loan 8 advances

Total deposits

Ta)#e8 .1

oan and Ad+ance( to Tota# De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

<oans and dvance otal eposit ?atio

1D6L1D6= &1&&2.60+ &2&=.20= D.++2

1D6=L1D66 &=&2&.+ 10=.11& D.=&

1D66L1D6 &+D.=+ 2+06.1 D.=D&

1D6L1D6+ 1&26=.& 1&=.2 D.=D

1D6+L1D60 16&1.D0 =222.16 D.0D

>ean D.=+$. D.&=&

6+



C.G 1=.+62


he ratio helps to analyze whether the outsider5s fund have been properly utilized. he

above table reveals that the ratio of the bank is in declining trend in first three years.

his implies the ratio of funds mobilization has been decreased despite of increase in

total deposit of the bank. In the last year i.e. #J 1D6+L60, the ratio has decreased to

D.0D which indicates the deposit mobilized in the form of loan and advances are lower

in comparison to total deposit. he table shows that average of D.=+ of total deposithas been disbursed as loan and advances and standard deviation is D.&=&.

#ig no; &=

.$.& Prof!ta)!#!t Rat!o;

8rofit is the difference between total revenue and total e'penses over a period of time.

It is an important factor that determines the firm5s e'pansion and diversification.

re"uired level of profit is necessary for the firm5s growth and survives in the

competitive environment. 8rofitability ratios have been employed to measure the

60



operating efficiency of the sample banks. here are many measures of profitability.

Each relates the return of the firm to its sales, assets, and e"uity or share value. s a

group, these measures allow the analyst to evaluate firms earning with respect to given

level of sales, a certain level of assets, the owners investment or share value. 8rofit of a

commercial bank is unlimited and it will have no future if it fails to make sufficient

profits. herefore the financial manager continuously evaluates the efficiency of the

bank in terms of profits. he profitability ratios in this study are calculated to measure

the operating efficiency and performance of *epal $4I 4ank <td. #ollowing are the

measure profitability ratios are calculated;

.$.&.1 Return on A((et(

he ratio is useful in measuring the profitability of all financial resources invested the

firm5s assets. It is also called net profit or loss to total assets or working fund ratio and

denoted by ?A. It is calculated as;

4eturn on Assets7 Net profit after ta9 NPAT/ Total Assets

Ta)#e8 .1/

Return on A((et( >ROA?

9?s in >illion:

#iscal Jear

*epal $4I 4ank

*et 8rofit after a' otal ssets ?atio

1D6L1D6= 1.& &&+.6 D.D&

1D6=L1D66 2&6.22 2D0&6.6+1 D.D&D

1D66L1D6 20&.1 2+D.60 D.D&D

1D6L1D6+ 6.=6= 6D++.12 D.D&D

1D6+L1D60 +D.&D= =+D=0.D+ D.DD+

>ean D.D&&

$. D.DD1

C.G &+.62+&+0$ources; ppendi'-CL.1.2.&

D



he above table shows that the net profit to total assets ratio has ranged between

D.&V in the year 1D6L6= which is highest among all five years. nd in the

remaining four years the ratio decreases. his reveals that the ratio is not satisfactory

level. he average or the period is D.D&&V and standard deviation for the period is

calculated at D.DD1V.

#ig no; &6

.$.&.$ Return on Shareho#der<( e;u!t

he ratio is tasted to see the profitability of owner5s investment. It reflects the e'tent

to which the ob/ective of business is accomplished. $o, all commercial banks have its

main ob/ectives to earn the ma'imum profit, so that they can run smoothly and get the

name and fame the ratio is of great interest to present as prospective shareholders and

also of great significance to management, which has the responsibility ma'imizing the

owner5s welfare. $o, higher is desirable. *et worth refers the owners claim on banks. It

is also called net profit to shareholders e"uity ratio on shareholder e"uity simply

denoted by ?AE. It is calculated as;

4eturn on ,hareholder;s e2uity7 Net profit after ta9NPAT/ 32uity capital

&



Ta)#e8 .10 Return on Net 6orth >Shareho#der<( E;u!t

9?s in >illion:

#iscal Jear

*epal $4I 4ank

*et 8rofit after a' E"uity capital ?atio

1D6L1D6= 1.D=+ &&.6+&1 D.&=&

1D6=L1D66 2&6.220= &&1.6D&0= D.&+21

1D66L1D6 20&.1&&0 1=D.==DD D.&=0+=0

1D6L1D6+ 6.=6000 1+0.102&=D D.&6&2

1D6+L1D60 +D.&D=02 2&0.=++62 D.&=D&=1

>ean D.&661

$. D.D&11DD

C.G .22+62


!ere net worth refers to the shareholders e"uity. he above table shows that return on

e"uity of the bank has slightly increases from D.&=V to D.&+V in the year 1D6=L66. In

the #J 1D66L6 , the ratio decrease from D.&=V #J 1D6L6+ the ratio again slightly

Increased to D.&6&V and average of D.&661V and standard deviation of D.D&11V.

#ig no; &

1



.$.&.& Intere(t Earned to Tota# A((et( Rat!o

Interest earning is the ma/or sources of a commercial bank. his ratio is calculated to

find out percentage of the interest earned in comparison to total assets. he ratio can be

calculated by suing the following formula@

.nterest earned to Total Assets7 .nterest 3arned

Total Asset

Ta)#e8 .12

Intere(t Earned to Tota# A((et( Rat!o 9?s in >illion:

#iscal Jear

*epal $4I 4ank

Interest earned otal ssets ?atio

1D6L1D6= 0D.=&2 &&+.6 D.D=6

1D6=L1D66 &6D.6 2D0&6.6+1 D.D

1D66L1D6 1160.D 2+D.60 D.D6D

1D6L1D6+ 2&D.121 6D++.12 D.D6

1D6+L1D60 260.+2 =+D=0.D+ D.D6=

2



>ean D.D=0

$. D.DD

C.G &1.DD+


he above table shows the interest earned to total assets of the bank varies from

D.D=6V to D.D in year 1D6=L66. In the ne't two year it increase to D.D6DV D.D6

respectively in the year 1D66L6 1D6L6+.he analysis indicates that the ratio is in

increasing trend which implies the rise in the interest income of the bank along with

total assets portfolio.

#ig no; &+

.$.&. Return on Tota# De"o(!t Rat!o

he collected deposits are mobilized in investment and loans to get profit. his ratio

indicates the percentage of profit earned by using the total deposit. It is calculated by

dividing the amount of net profit by the amount of total deposits which is presented

below;



Net profit to Total Deposit 7 Net Profit after Ta9Total Deposit

Ta)#e8 .19

Return on Tota# De"o(!t Rat!o

9?s in >illion:

#iscal Jear

*epal $4I 4ank

*et 8rofit otal eposit ?atio

1D6L1D6= 1.& &2&=.20= D.D&+

1D6=L1D66 2&6.22 10=.11& D.D&&

1D66L1D6 20&.1 2+06.1 D.D&&

1D6L1D6+ 6.=6= 1&=.2 D.D&&

1D6+L1D60 +D.&D= =222.16 D.DD0

>ean D.D&1

$. D.DD2

C.G 1=.=0

,ources: Appendi9>C?@###@

he above table shows the percentage of net earnings over the total deposit held by the

banks in the respective year of the study. he net profit of total deposit ratio of the

bank was highest in the 1D6L6= i.e. D.D&+V. In the ne't four years it decreases and

reaches to D.DD0 in the year 1D6+L60.

#ig no; &0

=



.$. Trend Ana#(!(

rend analysis, present or future analysis, is utilized to see the movement of upward or

downward by the help of given numerical values of some specified period of time.

hat time period may of five years, ten years etc. !ere, trend analysis of investmentand net profit, deposit, loan advance of the banks are done. he forecast is made for

the ne't five years. hese are based on the following assumptions;

• he main assumption is that other things are remaining the same.

• he forecast will be true only when a limitation of least s"uare method is

carried out.

• he bank will run is present position.

• he economy will remains in the present stage.

.$..1 Ana#(!( of Trend ,a#ue of Tota# In+e(t%ent and Net Prof!t

7nder this topic, an attempt has been made to analyze total investment and net profit

of *epal $4I 4ank <td for five years i.e. #J 1D6L6= to 1D6+L60 and forecast is made

for ne't five years till #J 1D2L.

Ta)#e8 .$:

6



,a#ue( of Tota# In+e(t%ent F Net Prof!t of Ne"a# SBI Bank td.

9?s in >illion:

#iscal years Investment *et 8rofit

1D6L6= 2D++.+0 1.&

1D6=L66 &21+6.1 2&6.22

1D66L6 &62D=.6 20&.1

1D6L6+ &+0&& 6.=6=

1D6+L60 162.= +D.&D=

#rom the above table it is clear that the trend value of investment of *epal $4I 4ank

<td is in increasing rend. #rom the above figure as compare to the investment made

by bank profit is slightly increase. he bank has made highest investment in the

Current #iscal year i.e. 162.= >illion during the past five years.

.

.& 7a*or '!nd!ng(



• he interest bearing deposit of the *epal $4I 4ank has mi'ed growth rate from

the year 1D6L1D6= to 1D6+L1D60. In 1D6=L66 bank succeed to get high interest

bearing deposit of &&D.D0DV whereas in 1D6L1D6+ banks interest bearing

deposit decreased by &0.&&DV.

• he saving deposit of *epal $4I 4ank has mi'ed growth rate. In the year

1D6=L66 the bank has highest saving growth i.e. 20.=+ V. In the year 1D6L6+

it decreases to &&.1+V.

• he fi'ed deposit was in #luctuating trend in the growth rate. !owever bank

succeeds to make more than double deposit than before year in 1D6=L1D66

#iscal year. In the ne't two years fi'ed deposit of the bank is decreased rate.

• Call deposit in the *epal $4I bank was good in 1D6=L66.Call deposit hugely

declined in 1D66L6 by 6.606V and in the year 1D6L6+ it declined to

-1D.=DV which was not good for the bank.

• *on-interest bearing deposit was not good in the year 1D6L6=. he non-

interest bearing deposit was in fluctuating rate through out the whole year

• Current deposit was not good for the bank in the year 1D6L6=. he bank has

highest current deposit growth rate i.e. 6.+1DV in the year 1D6=L66. In the

remaining three years current deposit decreased in the fluctuating rate.

• >argin deposit of the *epal $4I 4ank has mi'ed growth rate from the year

1D6L1D6= to 1D6+L1D60. In the current year 1D6+L60 bank succeed to get high

>argin deposit of &D+.0V whereas in 1D66L1D6 banks interest bearing

deposit decreased by -2.D&DV.

• otal deposit is composition of interest bearing and non-interest bearing

deposit. #rom the table we can see that the total deposit of the bank was highest

in the year 1D6=L66. . he total deposit was in fluctuating rate through out the

remaining three years.

• he above table shows that the current assets, current liabilities and current ratio

of *epal $4I 4ank <imited. In the #J 1D6L6=, the bank5s current ratio stands

is highest at 1.12. $imilarly the current ratio stands at &.DD, &.21+, &.==1

+



&.&D& in the later years i.e. in 1D6=L66, 1D66L6, 1D6L6+ 1D6L1D60

respectively. he ratio seems decreasing in #J 1D6=L66 and 1D66L6 again

slightly increases in the 1D6L6+ year.

• he above table shows that the Cash and bank balance to current assets ratio and

the percentage shows that how much of current assets of the bank represent cash

and bank balance. In the above five years the ratio increases from D.&10V to

D.=&V, which reflects good improvement during the period.

• he cash and bank balance to total deposit ratio reveals that the ability of banks

to cover its short term deposits. he ratio decreases in the 1D6=L66 year and

again increases rapidly in ne't two year i.e. #J 1D66L6 and #J 1D6L6+ which

implies the bank5s have sufficient cash but has maintain balances with increase

in total deposit. he average of the ratio and standard deviation are D.D0 and

D.D& respectively

• Cash and bank balance to fi'ed deposit ratio decreases in the 1D6=L66 year and

again increases rapidly in ne't two year i.e. #J 1D66L6 and #J 1D6L6+.In the

last year it decrease to D.&=1V.he average of the ratio and standard deviation

are D.&= and D.D1+ respectively

• he above table shows the loans and advances to fi'ed deposit of the bank for

four fiscal years. It reveals the proportion of loans mobilized in terms of its

fi'ed deposits. he ratio seems to be in decreasing trend during the study from

#J 1D6L6= to 1D6+L60.

• he above table shows the loans and advances to saving deposit of the bank for

four fiscal years. It reveals the proportion of loans mobilized in terms of its

saving deposits. he ratio seems in increasing and decreasing trend during the

entire study period standing at 1.0D, 1.=00, 1.20, 1.6= 1.=1 times. he

average of the ratio accounts at 1.6&& times.

• he ratio helps to analyze whether the outsider5s fund have been properly

utilized. he above table reveals that the ratio of the bank is in declining trend

in first three years. his implies the ratio of funds mobilization has been

decreased despite of increase in total deposit of the bank.

0



• he above table shows that the net profit to total assets ratio has ranged

between D.&V in the year 1D6L6= which is highest among all five years. nd

in the remaining four years the ratio decreases. his reveals that the ratio is not

satisfactory level. he average or the period is D.D&&V and standard deviation

for the period is calculated at D.DD1V.

• !ere net worth refers to the shareholders e"uity. In the #J 1D66L6, the ratio

decrease from D.&=V #J 1D6L6+ the ratio again slightly increased to D.&6&V

and average of D.&661V and standard deviation of D.D&11V.

• Interest earned to total assets of the bank varies from D.D=6V to D.D in year

1D6=L66. In the ne't two year it increases to D.D6DV D.D6 respectively in the

year 1D66L6 1D6L6+.

• he net profit of total deposit ratio of the bank was highest in the 1D6L6= i.e.

D.D&+V. In the ne't four years it decreases and reaches to D.DD0 in the year

1D6+L60.

• he bank has made highest investment in the Current #iscal year i.e. 162.=

>illion during the past five years.

+D



CHAPTER- ,

SU77AR CONCUSION AND RECO77ENDATION

summary of the study is presented in this chapter outlining the study5s introduction,

8urpose, ob/ectives, and methodology. he findings of the study are also presented in a

$ummarized form and recommendations are made where possible.

.1 Su%%ar

he present study has been carried out to e'amine various aspects of cash management

techni"ues, practices and policies used by the bank. In present commercial banks are

now growing and there are 21 commercial banks in *epal. !owever the study covers

only one bank i.e. *epal $4I 4ank ltd. he period covers five years from 1D6L6= to

1D6+L60. he study focuses on the cash management adopted by the *epal $4I 4ank.

It attempts to analyze the cash management of *epal $4I 4ank for the last five yearsfrom 1D6L6= to 1D6+L60. 4anking sector contributes significantly to the economic

development of the country. hough banking sector has well recognized the

importance of proper cash management, banks are still facing the problem of cash

management. $o, the ob/ectives of this study are to have true insights into its cash

management and to search for appropriate cash management techni"ues for the banks

in *epal. n attempt has been made in this study to provide a possible suggestive

framework for the better cash management of *epal $4I 4ank and to make sound

strategy in future for cash management system.

he #inancial statement, 4alance $heet and profit <oss aLc are the basic instrument

of an ccounting system to communicate financial information to users. 4alance

$heet shows the financial condition of the state of affairs of the firm at a particular

point of time while the profit <oss aLc shows the profitability of the firm by giving

details about revenues and e'penses for accounting period. he financial statements

serve as a means to the various stakeholders of the firm to analyze the

+&



organization financial strengths, weakness, and performance. here are various

ways to conduct a financial performance study. Ane of them is the financial ratio

analysis. financial ratio is a relationship between two financial variables. It helps to

ascertain the financial condition of a firm. ?atio analysis is a process of identifying

the financial strengths and weaknesses of the firm. 4anks play a vital role in the

economy of most of the countries in the world. hey are the 4ackbone of a country5s

financial system.

In order to fulfill the partial re"uirement for the egree of >asters in 4usiness

dministration, a study titled “Cash management of 4ank in *epal 9*epal $4I 4ank.

<td.:T was undertaken. he study seeks to assess the financial performance of the

banks with the help of ratio analysis as well as other relevant analysis for the period

starting from 1D6L6= to 1D6+L60. s the study is analytical-cum-descriptive in

nature, research is based on the historical data of the banks available in the annual

reports of the banks. he annual reports were collected from the respective banks aswell as the internet , books, periodicals, /ournals@ articles on the related sub/ect

were e'tensively reviewed in the library "uotations from various authors on the

related topic have been placed throughout the chapters. ?eviews of the previously

undertaken research studies have also been made in order to highlight the difference

and significance of this study.

#inancial as well as statistical tools have been used to determine the financial

performance of the bank. (hile ratio analysis is used to assess the li"uidity,

profitability position of the banks for which statistical tools such as@ mean,

standard deviation, coefficient of variation, have been used to determine the e'tent of

variability and similarity between the ratios of the banks. he findings of the study

have been presented in tables and graphs. nalysis and interpretation of the findings

are also presented for each of the ratios.

+1



he basic ob/ective of this study is to e'amine the cash management of *epal $4I

4ank. o fulfill this ob/ective and other specific ob/ectives as described in chapter one,

appropriate research methodology has been adopted.

his study is mainly based on the secondary data. he necessary data are derived from

the balance sheet and comparative profitLloss account of the respective bank for the

period of five years from 1D6L6= to 1D6+L60. he data are presented in suitable from

and well analyzed on the basis of available information.

.$ Conc#u(!on

uring the study period, *epal $4I 4ank was found to be the moving toward successful

achievement but due to tough competition with the other commercial banks in *epal it

was unable to retain its customers within itself. (e can see that the fi'ed deposits are

increasing yearly by yearly.

he conclusion of the study have been summarized and presented below.

• he li"uidity position of *epal $4I 4ank is fluctuating. It has the lower current ratio,

cash bank balance to current assets ratio. he cash and bank to total deposit ratio

shows that in some year it is in decreasing state which implies the bank5s doesn5t

have sufficient cash but has maintain balances with increase in total deposit .

• *epal $4I 4ank has a decreasing loan advance to total deposit ratio, for the 2

continuous years. his implies the ratio of funds mobilization has been decreased

despite of increase in total deposit of the bank.

.& Reco%%endat!on(

4ased on the analysis and interpretation of the data, this following are the suggestions

that have been recommendation for further improvement of cash management in

banks,

+2



• Cash planning and cash budgeting is needed on a formal basis so as to pro/ect

cash surplus or cash deficit for a period not e'ceeding one year and broken up

into shorter intervals.

• >anagement of cash flows is needed so as to accelerate the inflows and as far

as possible decelerate outflows.

• Aptimizing the level of cash balance is needed by matching the cost of holding

e'cess cash and danger of cash efficiency.

• Investing idle cash balance is needed taking into account the cost of

administering investment in marketable securities.

• Idle cash should be invested in profitable sector. he *epal $4I 4ank should

manage its cash affairs in such a way as to keep cash balance at a minimum

level and to invest the surplus cash funds in profitable opportunities.

• *epal $4I 4ank should first identify the cash needs for operation and cash

budget should be developed monthly, "uarterly and yearly basis.

Sabin Csh Management Thesis Final

Documents

Transcript of Sabin Csh Management Thesis Final