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CHAPTER 1
INTRODUCTION

1.1 Background of the study
According to the history of Nepal, the growth and development of the industries can
be traced to some thirteen or fourteen hundred years ago. Then in the early 1935 a
development agency named Udhyog Parisad was constituted for accelerating the
development of industrial and commercial activities within the country. Immediately
in 1936, the Nepal Company Act came into force and various small, medium and
large scale industries were established in the private sectors. Then after many
industrial policies and programs were declared and reformed again and again to speed
up the process of economic development. Industrialization is the major tool with the
aid of which the various circle of backwardness and poverty can be broken (Cuker,
1974). Industrialization helps the unemployed and underemployed persons especially
from the agriculture sector to find alternative modes of proactive activities and move
into much more productive activities, thereby reducing automatically the pressure on
land (Pradhan, 1984). That is why in every Development plans of Nepal, the word
industrialization has been mentioned too frequently.
1.2 Concept of Working Capital
Working capital refers to the cash a business requires for day to day operations, more
specially, for financing the conversion of raw materials into finished goods, which the
company sells for payment. Along with the fixed assets such as plant and equipment,
working capital is considered as a part of operating capital. It is calculated as assets
minus current liabilities. Working capital measures how much in liquid assets a
company has available to build its business. The number can be positive or negative,
depending on how much debt the company is carrying. If a company's current assets
do not exceed its current liabilities, then it may run into trouble paying back creditors
in the short term. The worst-case scenario is bankruptcy. A declining working capital
ratio over a longer time period could also be a red flag that warrants further analysis.
For example, it could be that the company's sales volumes are decreasing and, as a
result, its accounts receivables number continues to get smaller and smaller.
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Working capital also gives investors an idea of the company's underlying operational
efficiency. Money that is tied up in inventory or money that customers still owe to the
company cannot be used to pay off any of the company's obligations. So, if a
company is not operating in the most efficient manner (slow collection), it will show
up as an increase in the working capital. This can be seen by comparing the working
capital from one period to another; slow collection may signal an underlying problem
in the company's operations (Investopedia.com)
Working capital management is the process of managing activities and processes
related to working capital. This level of management serves as a check and balances
system to ensure that the amount of cash flowing into the business is enough to
sustain the company's operations. This is an ongoing process that must be evaluated
using the current level of assets and liabilities. Working capital management may
involve implementing short-term decisions that may or may not carry over from one
earnings period to the next (Businessdictionary.com).
1.3 Introduction to Himshree Foods Pvt. Ltd.
Himshree Foods Pvt. Ltd. Is one of the first manufacturers found within SAARC
nations. Himshree is an organization formed by merger of two big manufacturing
industries, Gandaki and Everest in 2056 B.S. It is fully established in 1982 and started
manufacturing stick noodles. Then after, it also manufactured instant noodles, both
white and brown. Himshrees products consist of brown noodles like AAHA, AAHA
50, A-One and FEWA with flavors like vegetable, chicken and mutton as well.
Himshrees only product of white noodles is RARA which is of chicken flavor.
Himshree exports its products in two neighboring countries: China and India. In
China, monthly export of noodles is 15,000 packets approximately, but its export to
India is a little less than China. However, Himshree products are considered as
qualitative products inside and outside national boundaries.
Within four years of its establishment, Himshree was successful to achieve Barcelona
Food Award in 1986 A.D. Himshree has been focusing on providing its valuable
customers with quality products and it has been successful on achieving standard of
the product. To maintain the standard of the product, Himshree has imported
manufacturing plant from Suzuki Company, a world renowned machinery and
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equipment brand. This machine is one of the best machines and has a capacity of
producing 10000 outputs per day. Even when a machine operates slower than its
actual capacity is able to produce 6000 outputs in a day. In order to bring quality in its
product, Himshree has equal emphasis on packaging as well. It imports noodles
packing plastic from Switzerland which makes noodles edible for 9 months after
packing. Also, all the raw materials necessary for manufacturing noodles passes
through laboratory tests to qualify as production input Himshree follows the
International Standard stated in ISO 9001:2000 in order to produce eco friendly
products and to meet its corporate social responsibilities (kanchan-
himalayancountrynepal.blogspot).
1.4 Statement of Problem
Working capital management is the determinant of success or failure of the business
organization both lower as well as higher working capital positions are dangerous
from the business point of view. Excessive working capital means idles, which earns
low profit for the firm, purity of working capital not only impairs but also results in
production interruption and inefficiencies. Thus the main problem is how to maintain
the optimal level of working capital in manufacturing enterprises. Working capital
management is linked with the continued existence of enterprise. Regardless of
excellent products, effective marketing, efficient production and optimum fixed assets
management, management has lost the control of its firm because of liquidity.

The main problem to which this study focuses on is how working capital management
has been done in Himshree foods Pvt. Ltd. This study focus to solve the following
questions:
Is there proper investment in current assets appropriate to total sales level?
What is the factor affecting element of working capital?
Is there sound liquidity position in the industry?
What is the current situation of the industry?



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1.5 Objective of the study
The fundamental objective of the study is to analyze the Working Capital
Management of Himshree Foods Pvt. Ltd. The specific objectives of the study are as
follows:
To analyze the Working Capital Policy used in Himshree Foods Pvt. Ltd.
To analyze the variables affecting Working Capital of Himshree Foods Pvt.
Ltd.
To analyze liquidity position and turnover position
To suggest the appropriate working capital management based on results of
analysis.

















5

CHAPTER 2
LITERATURE REVIEW
2.1 Working Capital Management
Samuels, (2006), argues that funds management is the planning, controlling and the
effective utilization of funds. Money can be earned not only through manufacture and
distribution but also through the management of all its assets that it employees. The
best funds management policy is through funds budgets. A company can decide on
the funds that it will have available for short-term investment at a particular time
depending on the nature of business and season. If a business is seasonal or trade is
cyclical, funds budgets will show when the surplus funds that will be available and
what length of time will elapse before they are required. Some companies will borrow
money in case of deficit spending to satisfy their seasonal needs.
Kakuru, (2000) argues that every organization must establish funds management
policies or guidelines to ensure that it has optimal funds balance at any time when it
requires it. This can be achieved by implementing the following funds management
policies. The organization must ensure that it speeds up funds inflows through
efficient credit policy. For example timely preparation and delivering of customer
invoices, making customers to pay their outstanding by allowing funds discounts.
This will enable the firm to keep in a liquid position and carry on its operations
efficiently.
Firms hold funds for primary reasons but although the first two of these are generally
satisfied by holding actual funds (a checking account balance, the last two
requirements may be meet, instead by holding highly liquid marketable securities.
The main reasons can be explained according to Bodil (1995) as below.
Funds inflows and out flows are somewhat unpredictable with the degree of
predictability varying among firms and industries. Therefore firms need to hold some
funds (or more often marketable securities) in reserve for random, unforeseen
fluctuations in inflows and outflows. These safely stock of funds are called the
precautionary balance and the less predictable the firms funds flows the larger the
necessary funds balance.
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Funds balance may also be held to enable the firm to take advantage of any bargain
purchases that might arise; these funds are defined as speculative balances. For
example reduction in the price of raw materials, any profitable short-term investment
that may happen, the firm should maintain such balance to take advantage of the
investment opportunities that may arise Campsey (2005).
Lending institutions such as banks, makes money by lending out funds that have been
deposited with it. So the larger its deposits, the better the bank profit position. If a
bank is providing services to a customer, it generally requires the customer to leave a
minimum balance on deposit to help offset the cost of providing the service Campsey
(2008).
Funds balances are necessary in business operations because payments must be made
in funds and the receipts are deposited in the funds account. These funds balances are
associated with routine payments and collections are known as transaction balances
Knott (2008).
Although a carefully prepared funds budget is a necessary starting point for managing
the firms funds, there are other elements of a good funds management programs. The
primary funds management activities are performed jointly by the firm and its main
bank, but the financial manager is responsible for the effectiveness of the funds
management programs.

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2.2 The relationship between funds management and Financial Performance
Shaw, (2006), explains that if an organization properly manages its funds and
maintains a positive balance especially on bank accounts in form of funds deposits, it
may increase on the profitability position through the interest earned. Having positive
funds balance enables a firm to take advantage of funds discounts from suppliers,
purchases input and enables the company to carry on further investment in profitable
ventures.
Wilkes (2006) and Samuels (2006), share the same view as Shaw (2006), on the
relationship between funds management and the profitability of a firm. Wilkes (2006),
argues that if a firm does not manage its funds properly it can easily go into
liquidation as a result of failing to pay the outstanding liabilities (suppliers, wages)
and meeting the day to day operation. This has an adverse impact on the profitability
of an organization. He adds that, a firm which keeps too much funds fore goes a
return if it invested in other profitable ventures. Funds can be lent out even for a short
period of time and interest is earned. Hence impacting on the profitability position of
organization. The organization must establish and install funds management programs
to ensure that there is a balance between benefits and costs. However, these programs
may be expensive to operate for example use of remote collection and disbursement
centers, involve additional costs and banks involved will require the firm to maintain
adequate deposit balance or pay sufficient fees to justify the services. All these costs
impact on the profitability position of the firm most especially small scale and
medium enterprises.
Campsey, (2005) explains that while there are good reasons for holding adequate
funds balance, there is an important reason for not holding excess funds balance.
Since fund is a non-earning asset, excessive funds balances simply lower the total
asset turnover there by reducing both the firms rate of return on equity and value of
its stock. Therefore firms are interested in establishing procedures for increasing the
efficiency of their funds management and the higher the level of short-term interest,
the greater the opportunity cost associated with holding excess funds. This implies
that holding excess funds means that return are foregone hence adversely impacting
on the profitability position of the firm.
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Khazi (2002), points out the relationship between funds management and profitability
by giving the effect of excess and shortage of funds. Holding excess funds means that
there is an opportunity cost in form of a return foregone because of holding it. On the
other hand funds shortage will disrupt the firms operation for instance failure to
acquire inventory for sale, inputs and meeting customers orders. Such situation
requires that an organization must design an appropriate funds management policy to
ensure that the best is derived from every single coin held at any period of time.
Management of small scale and medium businesses should establish and strengthen
the internal controls over funds and other financial resources to reduce on
mismanagement and misappropriations. The internal controls to be established among
others may include; segregation of duties, approval and authorization, physical
controls, accuracy and arithmetic, supervision of lower employees, and daily banking
of funds received to reduce on theft and mismanagement of funds resources Wilkes
(2006).
Organizations should hold funds to keep the liquidity level balanced so as to
maximize profitability. However, care must be taken to avoid excess funds because
of its effect such as theft, misappropriation and misallocation and still fore going a
return that could have been earned through investing the funds resources elsewhere in
profitable ventures.







9

CHAPTER THREE
METHODOLOGY
3.1 Introduction
This chapter elaborates the entire design of the study and how it will be carried out. It
will also explain how the study will be conducted, the area of the study, sample size
and sampling technique. It will also indicate how the data will be collected and
analyzed as well as the limitations of the study.
3.2 Research Design
The research will involve a cross sectional study using both qualitative and
quantitative research centered on working capital management practices. The
techniques will be designed in a way that would best suit quick collection of relevant
data. The data will be systematically collected and presented to give exploratory
analysis to particular phenomena with emphasis to cover the extent of the problem.
3.3 Study Population
The study will be carried out among the staff and customers of Himshree Foods Pvt.
Ltd. who will be drawn from production, marketing, stores and accounts department.
Management will also be targeted for the study research.
Both simple random and purposive sampling techniques will be used to select the
required respondents so as to minimize bias. Judgmental sampling will be used to
choose the respondents to form a sample that represents the study population.
3.4 Sample Design
3.4.1 Sampling method
The researcher will use simple random sampling techniques when selecting the
respondents for the study. The respondents will involve among others employees,
management and clients.


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3.4.2 Sample size
The study will encompass a representation of a sample of 30 respondents from
Himshree Foods Pvt. Ltd. who among others will be the employees from different
departments, management and clients who will be chosen for the study. This sample
size will be taken with consideration of time constraints, convenience and funds
among others. A special caution will be taken to ensure gender equality to avoid or
minimize biased results.
Table 1: Sample Size Distribution
Department No of Respondents
Production 15
Marketing and distribution 7
Management 2
Accounts 2
Clients 4
Total 30

3.5 Sources of Data
There will be mainly two major sources of data namely;
Primary data which we will get from selected respondents by use of self
administered questionnaires, interviews and observations.
Secondary data will be the other source of data which we will get from related
literature like accounting records of Himshree Foods Pvt. Ltd., published text books
and internet.


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3.6 Data collection methods and instruments
Data will be collected by the use of questionnaires, as described here under;
3.6.1 Questionnaire
This will be the dominant primary data collection method in the study. Here
comprehensive self administered questionnaires will be the main instrument in the
study. These will be designed to gather information and explore the key variables
addressed to staff and management. Both open and closed ended questionnaires will
be used to let the respondents give their own opinion about the research problem.
3.7 Data Processing and Analysis
3.7.1 Data processing
Upon collecting data, several methods will be used to process and analyze the data.
All the data collected will be checked for results on completion of the procedure, the
questionnaires will be handed over to the researcher. This will be compiled, sorted,
edited, classified and coded.
To improve on its accuracy and relevancy, it will be tabulated to reveal the
frequencies and percentage scores of different study attributes. This will be then
analyzed by calculating the financial ratios to reveal the financial performance of
Himshree Foods Pvt. Ltd.
3.7.2 Data analysis
To ease the interpretation of data, the study will be analyzed using statistical
techniques and qualitative techniques such as regression and correlation analysis with
help of Ms Excel and Ms Word to clearly come up with the relationship between
working capital management and financial performance.
3.8 Challenges/ limitations during the study
Misrepresentation of the research. That is thinking that one is a spy.
Inadequate literature on past studies conducted on working capital
management and financial performance of SMEs.
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3.9 Timeframe
Activity Week
1
Week
2
Week
3
Week
4
Week
5
Week
6
Week
7
Week
8
Topic
selection

Literature
review

Proposal
preparation
and
submission

Collection
of data

Data
processing
and
analysis

Data
presentation
and
analysis

Prepare
presentation

Draft final
report

Report
Submission

Thesis
Defense