TABLE OF CONTENT

CHAPTER I: Introduction...............................................................................................
1.1 Background of the study................................................................................................
1.2 Statements of the Problems.........................................................................................
1.3 Objectives of the study................................................................................................
1.4 Rationale of the study..................................................................................................
1.5 Limitation of the study.................................................................................................
1.6 Organization of the Study............................................................................................
CHAPTER – II: Litreture Review.................................................................................
2.1 Conceptual Framework................................................................................................
2.2 Review of Related Studies...........................................................................................
2.3 Research Gap...............................................................................................................
CHAPTER – III: Research Methodology......................................................................
3.1 Introduction..................................................................................................................
3.2 Research Design..........................................................................................................
3.3 The population and sample..........................................................................................
3.4 Period Covered............................................................................................................
3.5 Nature and source of Data Collection..........................................................................
3.6 Data collection procedures..........................................................................................
3.7 Statistical Tools Used..................................................................................................
3.8 Research Variables......................................................................................................
3.9 Research Methodology................................................................................................
3.10 Financial Tools..........................................................................................................
CHAPTER – IV: Data Presentation and Analysis.......................................................
4.1 Analysis of Income......................................................................................................
4.2 Analysis of source of expense.....................................................................................
4.3 Cost Volume Profit Analysis.......................................................................................
4.4 Break-even Point (BEP)..............................................................................................
4.5 Margin of Safety (MOS)..............................................................................................
4.6 Profitability analysis of MBL......................................................................................
4.7 Correlation Analysis....................................................................................................
4.8 Trend Analysis.............................................................................................................
4.9 Major findings of study...............................................................................................

1
CHAPTER V: Summary and Conclusion.....................................................................
5.1 Summary......................................................................................................................
5.2 Conclusion...................................................................................................................
5.3 Recommendations........................................................................................................
BIBLOGRAPHY.............................................................................................................
APPENDIX.......................................................................................................................

2
LIST OF TABLES
Table 4. 1: Sector wise Income from interest....................................................................
Table 4. 2: Sector wise Income form Commission and Discount.....................................
Table 4. 3: Other Operating Income..................................................................................
Table 4. 4: Non-Operating Income....................................................................................
Table 4. 5: Interest Expense...............................................................................................
Table 4. 6: Staff Expenses.................................................................................................
Table 4. 7: Other Operating Expenses...............................................................................
Table 4. 8: Income Statement............................................................................................
Table 4. 9: Cost Volume Ratio..........................................................................................
Table 4. 10:Contribution Margin.......................................................................................
Table 4. 11: Contribution margin ratio analysis................................................................
Table 4. 12: BEP Income...................................................................................................
Table 4. 13: BEP ratio.......................................................................................................
Table 4. 14: Margin of safety............................................................................................
Table 4. 15: Net Profit Margin Ratio.................................................................................
Table 4. 16: Return on total assets ratio............................................................................
Table 4. 17: Return on Equity ratio...................................................................................
Table 4. 18: Operating Efficiency Ratio............................................................................
Table 4. 19: Relationship between Total cost and profit...................................................
Table 4. 20: Relationship between Income and Profit.......................................................
Table 4. 21: Trend Value of Income..................................................................................
Table 4. 22: Trend value of Net profit...............................................................................
Table 4. 23: Trend line of total cost...................................................................................

3
LIST OF FIGURES
Figure 4. 1: Total Interest Income.....................................................................................
Figure 4. 2: Income from Commission and discount........................................................
Figure 4. 3: Other Operating Income.................................................................................
Figure 4. 4 : Non-Operating Income..................................................................................
Figure 4. 5: Interest Expense.............................................................................................
Figure 4. 6: Staff Expense.................................................................................................
Figure 4. 7:Admin. Expenses.............................................................................................
Figure 4. 8: Operating Profit and Net Profit......................................................................
Figure 4. 9 : Fixed cost and Variable cost.........................................................................
Figure 4. 10:Cost Volume Ratio........................................................................................
Figure 4. 11 : Contribution Margin....................................................................................
Figure 4. 12:Contribution Margin Ratio Analysis.............................................................
Figure 4. 13: BEP Income.................................................................................................
Figure 4. 14 : BEP Ratio....................................................................................................
Figure 4. 15 : Margin of safety..........................................................................................
Figure 4. 16: Net profit Margin Ratio................................................................................
Figure 4. 17:Return on total assets ratio............................................................................
Figure 4. 18: Return on Equity..........................................................................................
Figure 4. 19: Operating Efficiency Ratio..........................................................................
Figure 4. 20: Trend Line of Income...................................................................................
Figure 4. 21: Trend Line of Net Profit...............................................................................
Figure 4. 22: Trendline of Total cost.................................................................................

4
ABBREVIATION

% Percentage
A/C Account
B. S. Bikram Sambat
BEP Break Even Point
C. V. Coefficient of Variation
CM Contribution Margin
F/Y Fiscal Year
FC Fixed Cost
GDP Gross Domestic Product
NP Net Profit
NPMR Net Profit Margin ratio
P/V Profit Volume
PPC Profit Plan and Control
ROE Return on Equity
ROA Return on total assets
MBL Machhapuchhere Bank Limited
S.D. Standard Deviation
VC Variable Cost
MOS Margin of Safety
& And

5
 CHAPTER I
INTRODUCTION

1.1 Background of the study

Profit is the lifeblood of a business organization which not only keeps it alive but also
assures the future and makes it sound. In other words, every such organization needs
profit to survive and complete in open market. The success or the failure of the
business firm depends upon the margin of profit because profits are the primary
requirements for its success. The excess income over expenditure is called profit. The
word profit brings for visions of reserves. The concept of profit is not new, but the
concept of profit planning & control is a tool of management used in profit making
organization. The managerial skill which increases revenues and minimize the cost is
called profit planning and control. Profit planning and control involves long term
commitment waiting for a reward which comes in future and always remains
uncertain. Therefore, every planning entails some degree of uncertainty. So, we can
conclude profit planning and control is as an organized and formal approach for
realize the planning, synchronization and control responsibilities of management
which provides guidelines to the overall managerial task. (Fago & Niraula)
The main objectives of any business organization are to maximize its profits and at
the same time render reliable service to its customers. Both the objectives have a great
significance for the proper management of the organization. Profit is a device with the
help of which efficiency of an enterprise can be measured.
Before evaluating an intelligent approach to managerial process of profit planning, it
is important that we understand the management concept of planning and budgets.
Planning is the process of developing enterprises objectives and selecting future
courses of action to accomplish them. In other words, planning is the first essence of
management and all other functions are performed within the framework of planning.
The main objective of planning in business is to increase the chance of making profit.
The budget is the primary planning operating document committed to performance. In
this sense, budget is also called a profit plan. A budget is a numerical plan of action,
which generally covers the areas of revenues and expenditures. (Fago & Niraula)
Profit planning is a comprehensive plan expressed in financial terms by which an
operating program can be made effective for a given period it is a tool of direction,
co-ordination, and control and as such it is the most important administrative device
for these purposes. Profit planning and control is the latest invention in the field of

6
modern management. A comprehensive profit planning and control is viewed as a
process designed to help management effectively perform significant phases of
planning and controlling functions. (Fago & Niraula)

Every business or institution is established on the definite goals and objectives. All
the tasks are performed by company according to their objectives. Mainly two types
of institutions are established, one is profit oriented and another is service oriented.
As like in the other profit-oriented business organizations, commercial bank has also
to make reasonable profit for its survival. Most of the commercial banks are formed
under the company Act with joint stock and the shares being traded at stock
exchanges. Therefore, profit made by them has also remained as one of the vital
parameters for measurement of the efficiency. (Fago & Niraula)

1.1.1 Nepalese Economy-The Current Picture

Nepal is a landlocked country and lies between two large countries India and China in
the central part of Asia with the area of 147,181 sq. km. and only about 27 % of the
total land area is under cultivation. Nepalese economy is fully depended on
agriculture. So, it plays a vital role in the Nepalese economy. More than 78 % people
depend upon agricultural sector. Agriculture is the major instrument of progress,
modernization, and social change in Nepal. The share of manufacturing sector in the
total GDP is 10 %. The government of Nepal has initiated liberal, open and market
oriented economic policy since 1990s immediately after the restoration of the
democracy. The deteriorating law and order situation, political instability in the
country in the past few years has adversely affected the country’s economy. Because
of political unrest, Nepal has been facing very difficult situation. Economic activities
including the development works were affected. Local level investment could not
increase due to the absence of elected bodies and rural sector was adversely affected.
Increasing number of youths continued to drain abroad in search of foreign
employment. Under these circumstances, economic growth remained low compared
to the target in the tenth plan. The growth in other sectors of the economy is
embarrassed by the small domestic market, poor physical infrastructure, inadequate
human and financial resources, and locked position of the country, the political
instability, and the geography of the country.

1.1.2 Historical background / Origin and growth of banking sectors in Nepal.

7
The growth of banking sector in Nepal is not so long, is still in evolutionary phase. In
comparison with other developing or developed country, the institutional development
in banking system in Nepal is far behind. Nepal had to wait for a long time to come to
this present Banking position. The origin of Bank in Nepal and its beginning of
growth is controversial.

Even though the specific data of the beginning of money and Banking facilities in
Nepal is not obvious, it is speculated that during the reign of the king Mandev, the
coin “Manak” and “Gunank” during the reign of the king Gunakamadev were in use.
Historically, we find the evidence of minted coin of Anshuverma in 7th century and
later coin of Jishnu Gupta. In the beginning of eighth century, king Gunakamadev
renovated the Kathmandu city by taking loan and at the end of the same century; a
merchant named shankhadhar had started the “New Year” Nepal Sambat after freeing
all the people of Kathmandu from the debt. Sadashiva Dev in 12th century,
introduced, silver coins, king Jayasthiti Malls had given the responsibility to a caste of
society called “Tankadhar” while he had given the name of the Castes and their
profession for the purpose of transaction of money in the society. In the same century
copper coins were used by King Ratna Malla of Katmandu, silver coins by Mahendra
Malla and the gold coins by the last Malla king of Katmandu, Jayaprakash Mall.
(Jethara, 2021)

After the unification of Nepal, Prithvi Narayan shah, the great king had used coin
mohar in his name. An institution called tasker was established in 1989 and it started
to issue the coin scientifically. In this way, we see that the coins have been in use
from the ancient time and there was practice of taking and giving loan for the purpose
of trade and other various purposes. During the reign of Ranodip Singh, an Office
named ‘Tejarath’ was established in Katmandu in 1933 (B.S.). It was used to provide
loans to the government officials and the people against deposits of gold & silver. It
had also extended its branches outside Katmandu valley for giving loan. But this
office had no right to accept deposit of public and it had no characteristics of modern
Bank. Nevertheless, we can say that the institutional Banking system had started from
then after having a treaty with British India in 1985 (B.S.), Nepal could trade over sea
freely for the diversification of trade. As a result, in 1993(1936), the draft of the
company Act and Banking act were prepared by forming industrial council “A jute
Mill” was established in Biratnagar under this act and both commercial and industrial

8
development as well as institutional Banking system had been started together at a
time in Nepal. (Jethara, 2021)

After the establishment of Nepal Bank limited on 30th Kartik, 1994(1938), modern
Banking system started in Nepal. As a first commercial Bank of Nepal, the Bank was
established to render services to the people and for economic progress of the country
prior to the establishment of Nepal Rasta Bank. It played the role of central Bank also
with the establishment of NRB in 1959; the development of financial system took a
momentum. After then the Nepal Rastra Bank came into existence as the central Bank
on April 26, 1956. It had authorized capital of Rs 10 million fully subscribed by the
government. It was empowered by Act to have direct control over financial
institutions within the country. It started issuing currency in 1959 A.D. The second
commercial Bank Rastriya Banijya Bank was established in 1966 A.D. beside Nepal
Bank Ltd and RBB other commercial Bank did not come into existence until 1984
A.D. The commercial Banking act 1974 was amended in 1984 A.D. to increase the
competition between commercial Bank as per the provision made in this act private
sectors [including foreign investment] was given freedom in opening commercial
Bank. Subsequently, embarked upon structured adjustment program encompassing
measuring to increase domestic resource and mobilization strengthen financial sectors
and liberalize industrial and trade policy. Since, then, several financial institutions and
commercial private Banks have been established in the process of development and
liberalization policy for the economic development of the nation. (Jethara, 2021)

The basic objective to allow foreign joint venture and private Banks for operation in
Nepal was mainly to develop. The Banking sectors to create healthy competition for
future development of already existing old Banks. To introduce new technological
efficiency in Banking sectors, HMG/N has made an umbrella Act called Bank and
financial institution ordinance 2060” to promote the trust of public over Banking and
financial system. Promote the rights of depositors and private reliable and quality
services through healthy competition among the financial institutions to strengthen the
national economic through liberalization of Banking and financial sectors and
establishment, operation and hording and monitoring of the financial institution. This
Act has frozen all the previous acts relating to Banks and financial institution. At a
present, there are commercial Banks, development finance company and cooperative
and a central Bank. (Jethara, 2021)

9
1.1.3 Major Financial Policy of Nepal
The financial sector policies in the least developed countries have changes during the
least three decades and Nepal is not an exception. The elimination of credit control,
deregulation of interest and exchange rate, easy entry of banks and financial
institutions into the financial system, privatization of financial and non-financial
institution, autonomy of NRB etc. are the important dimension of financial
liberalization in Nepal. Monetary policy, banking policy, credit policy and the interest
rate policy are the major financial policies. The NRB has a major role to play in the
formulation, implementation monitoring and supervision of such policies.

(A) Monetary Policy.

Nepal Rastra Bank began exercising monetary policy since mid-1960 with instrument
like credit control regulation, interest rate administration, margin rate, refinance rate
and cash reserve ratio. In the 1970s liquidity requirement, credit limits, and direct
credit programs were introduced. Open market operation evolved only in the 1990s
with policy shift from direct to indirect monetary control. The basic objectives of
monetary and credit policies have been fostering growth, generating employment,
addressing poverty, containing prices, promoting external trade, and attaining healthy
balance of payment of the country. The most important goals for monetary policy in
Nepal are to maintain the price and external sector stability. Excess money supply
causes an upward pressure in the level of prices by increasing aggregate demand in
the economy in the wake of inelastic supply of output. So monetary policy purports to
limit prices by disallowing money to increase more than desired demand for it.
(Budha, 2015)

B) Banking Policy.

The NRB has issued its new licensing policy for the establishment of commercial
banks, finance companies and development banks on 1st shrawan 2063. The main
provisions contained in the new licensing policy are as follows:

 Change in minimum capital requirement of the financial institution while

starting the financial institutions.
 List of documents to be presented for carrying out the financial transactions in
Nepal.

10
 Minimum requirements of the directors & promoters.
 Probable conditions where NRB may reject the application for establishment
of the financial institution.
 Provisions regarding the expansion of business of the financial institutions.
 Provisions regarding the preliminary expenses.
 Formats of the applications & commitments.

C) Credit Policy.

Nepal Rastra Bank has also been exercising monetary and credit policies through the
same manner. But monetary & credit policies are not the same. Monetary policy is
defined as a policy affecting changes in the quantity of money while credit policy is
defined as a policy affecting the cost, availability, and the allocation of credit. In the
past NRB has introduced the priority sector lending programmed. Under this
programmed all the banks were required to extend certain percentage of their lending
to the prescribed priority sector. However, this priority sector lending requirement is
now phased out. With an objective of minimizing the concentration of the credit risk,
the NRB has prescribed the single borrower limit for fund based as well as non-fund
based. (Budha, 2015)

D) Interest Rate Policy.

There exists a wide array of interest rate in the economy. This is either because of
wider verities of securities having different liquidity, term structure and degree of risk
or market imperfection. Interest rate is one of the monetary policy variables along
with money supply and credit. In the process of financial system liberalization,
initiatives to deregulate interest rate structure in Nepal were taken since mid-1980s.
The complete liberalization of the interest rate structure, however, took place in 1989
only whereby the commercial banks were set free to determine the deposit and
lending rates. However, the existing number of the commercial banks and the level of
competitiveness in the financial market have not allowed interest rate structure to
evolve through a perfect market mechanism. Further, there is a great deal difference
in the level of interest rate on loans between formal and informal market. Informal
market rate for borrowing is much higher than the formal market rates. One
noteworthy situations of the Nepalese financial system have been the poor sensitivity
of the commercial banks to changes in bank rate by the NRB. This is because of the

11
excess liquidity in the banking sector and therefore commercial banks do not resort to
the central bank borrowing for financing their lending activities. (Budha, 2015)

1.1.4 Conceptual framework of profit planning.

Profit planning is a part of overall process of an organization. Therefore, this concept
has wide application of any kind of business concern for the best utilization of the
scare (limited) resources and effectively and efficiently achieving its goal. Profit is the
lifeblood of any business organization which not only keeps it alive but also assures
the future and markets it sounds. In other words, every such organization needs profit
to survive and compete in the open market. The success and failure of firm depends
upon the margin of profit because profit is primary requirement for its success. More
ever the margin of profit is regarded as an indicator of economic situation of the
business firm. Since profit earning plays a vital role for achieving the objective of on
organization. It is necessary for all organization to earn reasonable profit.

The main objectives of any organizations are to maximize its profit and at the same
time render reliable service to its customer. Both objectives have a great significance
for the proper management of the organizations. Profit is a device with the help of
which efficiency of enterprises can be measured. However, profit cannot be achieved
without good organization’s management. Before we make an intelligent approach to
managerial process of profit planning. It is important that we understand the
management concept of planning and budget. Planning is the process of developing
enterprises objectives and selecting future course of action to accomplish them.
Planning means deciding in advance what is to be done in future. Planning starts from
forecasting and predetermining of future events. The main objective of planning in
business is to increase the chance of making profit. The budget is the primary
planning operating document committed to perform. In this sense budget is also called
a profit plan.

A budget is a numerical plan of actions, which generally covers the areas of revenues
and expenditures. The main aim of budgeting is to present the future forecasting
numerically expressed in appropriate format. So as, to have proper control over profits
and costs.

Profit planning is comprehensive plan expressed in financial terms by which

operating programs can be made effective for a given period. It is a tool of direction,

12
coordination, and control and as such it is the most important administrative device
for this purpose. Profit planning and control (PPC) is the latest invention in the field
of modern management. According to G.A. Welsch R.W. Hilton and P.N. Gordian’s
comprehensive profit planning and control is viewed as a process designed to help
management effectively perform significant phases of planning and controlling
functions. Profit planning is now an important responsibility of financial manager
while activities of this sort require an accounting background. They also set heavily
upon the knowledge of business, economics, statistics, and mathematics. Hence, from
organization viewpoint, any effort to continue profit planning activities within the
framework of accounting procedure would be to determine the long-range interest of
the firm. Therefore, in both definitions, we could find a fit similar rigor that is it is the
business decision making which is the mainly exercised by financial manager. To
achieve good prospect in business in terms of returns on investment. In fact, profit
does not acquire immediately, it is managed. The technique of managing profit is
called profit planning. For the long run, stability of a firm, every task should be
performed according to long term vision. Profit planning directs organization towards
achieving the largest on profit. Therefore, it is the part of several planning process on
organization. Budget is the primary operating documents in this regard. Profit
planning requires commitments on the performance of budgeting. To be more specific
various functional budget are the basic tools for proper profit planning. Therefore,
later is in fact a management technique. It is a formal statement of policy, plan,
objectives, and goals of the organization established by the top management. So
commercial Bank must make reasonable profit for its survival. Most of the
commercial Banks are registered as a company with joint stock and the share being
traded at stock actions. Therefore, profit made by them has also remained as are of
vital parameter for measurement of the efficiency of these Banks. (Welsch & Hilton,
1998)

1.1.5 Focus of the Study

This research study is focused on evaluating the use of different types of functional
budgets and corporate planning system for the effective implementation of profit
planning in MBL. This study is designed to describe the purpose of the different kinds
of budget used, how they are applied and finally settled and how they assist in policy
making and in financial control. The study is intended to clarify the purpose of

13
different budgets and to identify the person responsible for different items in the
problems.

Generally, two types of profit planning practices are used in an organization; they are
strategic long range profit plan and tactical short range profit plan. Long range profit
covers horizon of two years of more and short-range profit plan made generally for
coming years. Both plans are equally important for the successful operations of the
organization, but this study is designed to give more consideration in short range
planning.

To analyzing the short-range planning of Machhapuchhere Bank Limited following

plan will be specially analyzed. The process and techniques of preparing them
responsibly to prepare them, their drawback, and other relevant facts as well as role in
profit planning will be discussed in detailed.

 Loan disbursement plan

 (Loan disbursement plan will be analyzed by the category of loans)
 Fund collection plan. (This budget contains the money collection by different
types of account loan from NRB and other Bank and financial companies.)
 The expenses budget (MBL prepares many expenses budget is following
employee, salary and allowance operations and maintenance vehicles, over
time overhead).
 Capital expenditure budget
 Cash flow budget
 Cost volume profit relationship.

1.1.6 Profit of Machhapuchhere Bank Limited

Machhapuchchhre Bank Limited was registered in 1998 as the first regional
commercial bank from the western region of Nepal and started its banking operations
from Pokhara since year 2000.

The Bank facilitates its customers' need by delivering the best of services in
combination with the latest state of the art technologies and prudent international
practices. The bank provides modern banking facilities such as Any Branch Banking,
Internet Banking, Mobile Banking, Safe Deposit Locker facilities, Utility Bill
payment (Telephone & Mobile), ATM (VISA Debit Cards) to its valued customers.

14
Besides these, the Bank is providing 365 Days Banking and Evening Counter services
to the customers through many of its offices.

The Bank has been promoted by highly renowned Non-Residential Nepalese,

prominent businessman and industrialists with a vision and dedication to provide the
best financial products and services in the most efficient and professional manner.

Now with a paid-up capital of over 9.05 billion rupees, 162 Branch Offices,176
Branchless Banking Units,7 Extension Counters and 203 ATMs spread across the
country, it is one of the full-fledged national level commercial banks operating in
Nepal. It takes pride in having its own buildings for its Head and Corporate Office in
Lazimpat, and Branch offices in Naya Bazar, Pokhara, Jomsom, Baglung and
Damauli. (Machhapuchchhre Bank Limited, n.d.)

1.2 Statements of the Problems

profit is the primary measure of business success. At least normal profits are
necessary for the operation of any kind of organization. But commercial bank must
profit out of its operations for its survival and fulfillment of the responsibilities
assigned. The commercial bank must maximize profit as well as to render service.
Both objectives have their linkage with the managements of an organization. A
manager generally says that profit is the return of good management. Therefore, we
can say that management is the part of the profit planning.

Profit planning and control (PPC) model provides a tool for more effective
supervision of individual operations and practical administration a business. So, the
successful operations of any it largely depends upon the planning system that it has
adopted. Profit plan is one of the most important managerial devices that play key role
for the effective formation and implementation of strategic as well as tactical plan of
an organization. Profit planning system requires the effective co-ordination between
various functional budgets of an organization like as sales plan, production, material
requirement budget, labor cost budget, cash budget and capital expenditures budget.

The major activities are including in commercial bank to mobilize resources, which
involves cost, and profitable deployment of those resources, which generates income.
The differential interest income over the interest, which is popularly called as interest
margin can be considered as the contributed margin in the profit of the bank.

15
The present study has tried to analyze and examine the PPC side of commercial bank
taking a case of MBL bank. This research report attempts to show the relationship
between these various functional budgets their achievement and their effective
application within the conceptual framework of profit planning for solving the
problems that have occurred. If MBL bank is funded to have been earning profit overs
the years. this study will answer whether it is under a planning or not. If the profit has
not been realized under the technique of profit planning. Furthermore, the study has
tried to answer the following research questions:

 What are the overall profit planning problems of MBL Bank?

 Does MBL Bank have appropriate profit planning system?
 Does the bank mobilize the deposit & other resources optimally?
 What is the gap between Budgeted & Actual performance?
 Does the bank deploy the resources generation satisfactory yield?
 What are the overall PPC problems of MBL Bank and what suggestions can
be recommended for their proper solutions?

1.3 Objectives of the study

The main objective of the present study is to exam the main approaches of profit
planning and to test the extent of achievement of planning of MBL with consistently
the present research will try to meet following.

 To examine the present profit planning premises adopted by MBL based on

budgeting.
 To analyze the variance of budgeted and actual achievement.
 To sketch the trend profit and loss.
 To analyze the various functional budgets and financial plans formulate and
implemented in Machhapuchhre Bank Limited.
 To provide the suggestion and recommendation for improving of the overall
profitability of the bank.
 To observe MBL Bank’s profit planning based on overall managerial Budgets
developed by the Bank.

1.4 Rationale of the study

This research is concerned with the profit planning in commercial banks with a case
study of MBL. Profit planning process significantly contributes to improve the

16
profitability as well as the overall financial performance of an organization.
Accomplishment of objectives in every organization depends upon the application of
scarce resources most effectively. Also, the financial performance of an organization
depends purely on the use of its resources. Budgeting is the key to productive
financial planning. Therefore, the planning process of every organization will be
effective and result oriented, then the pace of development naturally steps forward.
Profit planning is the core area of management. It tells us profit as the most important
indicators for judging managerial efficiency because profit does not just happen for
this every organization have to manage its profit. Various functional budgets are the
basic tools for planning of profit and control over them. This research study may be
useful for those who want to know the PPC in the MBL. It may also be helpful for
the future researchers as a reference material.

1.5 Limitation of the study

Today world is dynamic, everything existing here are of limit character. Every
principal rule and formula and conditions are applied with in the limitation likewise,
this study cannot escape from limitation and study is confined only to profit planning
and budgeting in MBL. Following factors have limited the scope of this study.

 The study is made for partial fulfillment of the requirement of master's in

business studies (MBS) in a short duration of time.
 The study is limited to the related profit planning of MBL.
 Secondary data is analyzed to delineate result.
 Analysis evaluated comparing Fiscal Year 2072/73 to 2077/78 only.
 Only Machhapuchhre bank limited is taken into consideration in this study.
 The accuracy of this study is based on the data available from the management
of MBL the various published document of MBL Bank.
 Most of the data will be used from the available secondary sources.
 Only few financial and statistical tools are used in the analysis.

1.6 Organization of the Study

The structure of the thesis report will comprise of five chapters which have been
briefly described as follows:

Chapter--I: Introduction

17
Introduction section provides an overall description of the study to be carried out.
This chapter includes background of the study, Nepalese Economy-the current
picture, Historical background / Origin, and growth of banking sectors in Nepal,
Major financial policy of Nepal, Conceptual framework of profit planning, Focus of
the Study, Profile of MBL Bank, Statements of the problems, Objectives of the study,
Rationale of the study, Limitation of the study.

Chapter –II: Review of Literature

This chapter describes theoretical analysis and brief review of related and pertinent
literature available. It includes conceptual review of commercial banks & review of
empirical work. For this purpose, various books, journals & periodicals as well as
internet shall be used.

Chapter—III: Research Methodology

This chapter describes the research methodology enjoyed in the study. It includes
Research design, Sample selection, Sources of data, Data collection procedure & tools
for analysis of the study.

Chapter—IV: Presentation & Analysis of Data

This chapter is one of the main chapters of this study. This chapter illustrates the
collected data into a systematic format such as graphs. It discusses the analysis of the
data as well as interpretation of data.

Chapter—V: Summary, Conclusion & Recommendations

This chapter comprises the summary of entire thesis. It describes major findings of the
thesis and provides some suggestions & recommendations based on the analysis of
study. A bibliography and appendices will be attached at the end of the study.

18
 CHAPTER - II
REVIEW OF LITERATURE

This chapter is concerned with review of literature relevant to the topic ‘Profit
Planning of Commercial Bank’. The purpose of reviewing of literature is to develop
some expertise in one’s area, to see what new contribution has made and to receive
some ideas for developing a research design. Thus, previous studies cannot be ignored
as they provide the foundation of the present study. This chapter highlights the
literature that is available in concerned subject as to my knowledge, research work,
and relevant study on this topic, review of books, journals and articles and review of
thesis work performed previously.

2.1 Conceptual Framework

Review of supportive text provides the essential conceptual framework and
foundation to the present study. For this various book, journals, articles and some
dissertations etc. dealing with theoretical aspects profit planning is taken into
consideration.

Figure2. 1 : Conceptual Research Framework

19
2.1.1 Concept of profit planning

Profit planning is the set of actions taken to achieve a targeted profit level. These
actions involve the development of an interlocking set of budgets that roll up into a
master budget. The management team adjusts the information in this set of budgets to
arrive at the combination of actions needed to arrive at the targeted profit level. The
planning process may involve a significant amount of what-if analysis, to see what
happens to projected profits in different scenarios. “A profit planning and control
program can be one of the more effective communication networks in an enterprise.
Communication for effective planning and control requires that both the executive
and the subordinate have the same understanding of responsibilities, ensure a degree
of understanding not otherwise understanding of responsibilities, and ensure a degree
of understanding not otherwise possible. Full and open reporting in performing
reports that, fouls on assigned responsibilities likewise enhance the degree of
communication essential to sound management” (Welsch, et al., 2001:215).

20
“Profit Planning is a comprehensive statement of intentions expressed in financial
terms for the operation of both short and long period. It is a plan of the firm's
expectation and is used as a basis for measuring the actual performance of managers
and their units. A profit plan has an immense value in management; it helps in
planning and coordinating if used appropriately, but not a replacement for
management. Profit planning is a comprehensive and coordinated plan expressed in
financial terms for the operations and resource of an enterprise for some specific
period in the future" (Fremgen, 1976: 12).

“Profit Planning is an example of short-range planning. This planning focuses on

improving the profit especially from a particular product over a relatively short period
of time. Therefore, as used here, it is not the same as corporate planning of a cost
rendition program” (Terry, 1968:245).

2.1.2 Concept of profit

Profit describes the financial benefit realized when revenue generated from a business
activity exceeds the expenses, costs, and taxes involved in sustaining the activity in
question. Any profits earned funnel back to business owners, who choose to either
pocket the cash or reinvest it back into the business. Profit is calculated as total
revenue Less total expenses.

Profit is the basic elements of profit plan so that the concept of profit planning may
not be completed and meaningful in absence of the clear- cut well defined idea of
profit. Oxford dictionary defines profit as a (a) financial gain and amount of money
gained in business especially the difference between the amount earned and the
amount spent (b) Advantage or benefits gained from something (Horngreen, et al.,
1992:63).

2.1.3 Concept of Planning

Planning is the process of thinking regarding the activities required to achieve a

desired goal. Planning is based on foresight, the fundamental capacity for mental time
travel. The evolution of forethought, the capacity to think ahead, is considered to have
been a prime mover in human evolution.[1] Planning is a fundamental property of
intelligent behavior. It involves the use of logic and imagination to visualize not only
a desired end result, but the steps necessary to achieve that result.

21
An important aspect of planning is its relationship to forecasting. Forecasting aims to
predict what the future will look like, while planning imagines what the future could
look like.

Planning according to established principles is a core part of many professional

occupations, particularly in fields such as management and business. Once a plan has
been developed it is possible to measure and assess progress, efficiency and
effectiveness. As circumstances change, plans may need to be modified or even
abandoned. “Planning is the first essence of management and all other functions are
performed within the framework of planning. Planning means deciding in advance
what is to be done in future. Planning starts from forecasting and predetermination of
future events. Planning is the whole concept of any business organization with proper
and effective planning. No firm can accomplish its predetermined goals and
objectives. Hence it is the life blood of any organization which helps them to run
efficiently in competitive environment. Planning is techniques were by the use pattern
of resources is carried out” (Agrawal, 2000:24).

“The planning processes both short and long term is the most crucial component of
the whole system. It is both foundation and the bond for the other elements because
it is through the planning process that we determine what we are going to do, how we
are going to do it and who is going to do it. It operates as the brain center of an
organization and like the brain it both reason and communicate” (Welsch, et al.,
2001:73).

Planning is the conscious recognition of the futurity of present decision (Drucker,

1989:87).

“Planning is the feed forward process to reduce uncertainty about the future. The
planning process is based on the conviction that management can plan its activities
and condition that state of the enterprise that determines its density” (Pandey,
1991:325).

Planning could be taken as the tools of achieving organizational goals efficiently and
effectively from the selection of various alternatives with in an acceptable time frame.
The essence of planning is:

• To accomplish goals

22
• To reduce uncertainty

• To provide direction by determining the course of action in advance.

2.1.4 Types of Planning

Corporate planning

The concept of corporate planning was first introduced and started in the United State
in the late 1950's and nowadays it has been using in several companies in all over the
world. The premises of the corporate planning are as follows (Robertson, 1968:245).

• Before drawing up a plan which is designed to decide something what the

corporation wants to do.

• In these days of rapid change, it is necessary to look ahead as for as possible to

anticipate these changes.

• Instead of treating a company as a collection of departments treat it as a

corporate whole, and

• Take full accounts of the company's environment before drawing up and plan.

He has also defined corporate planning as; it is to determine the long-term goals of a
company as a whole and then to generate plans designated to achieve these goals
bring in mind probable change in its environment.

Strategic Long-range Planning

Strategic planning is a top management function in which the organization's purpose,

mission and overall objectives and policies are developed to position the organization
advantageously in its operating environment. It refers to the selection of company
objective and the determination of the growth or at least constant and competitive
policies that are most likely to accomplish those objectives. It is carried out the
highest policy making level of the organization will travel. Management planning and
control is the process carried on within the framework established by strategic
planning. "Long range 5 to 10 years varying with the enterprise sometimes
extended to 10 years. It is one of the most difficult times spans involved in
planning as many problems in short range planning can be traced to the absence of
clear sense of direction and the practice which a comprehensive long-range plan

23
provides. Basically, the long-range planning is more important for broad and long
living enterprises. “A long-range planning is closely concerned with the concept of
the corporation as a long living institution” (David, 1964:298).

The planner must include the following factors in his/her plan from the analysis of
available information

• Probable future opportunity

• Uncertainty and

• Challenges

Long range planning is the continuous process of making present entrepreneurial (risk
taking) decision. Systematically and best possible organizing efforts is need to carry
out these decisions and measuring the result of these decisions against the
expectations through organized systematic feedback (Drucker, 1989:165).

It is a decision-making process. Such decision should be related about Determination

of goals, objectives and strategies.

• Level and direction of capital expenditure.

• Accession of new sources of funds.
• Organization design and structure etc.

Tactical Short-Term Planning

A tactical planning is done at all level and involves directing the organizations
activities to achieve overall strategic objectives with the organization's mission and
policies. Standing plans provide consistency and efficiency for non-going
operations, and single use plans are developed for unique situation. Projects are short
term plans designed to achieve objective within large scale programs. Short term
plans cover about a year, and are less formal and detailed than long range plans,
which usually cover more than three months. The short-range planning is selected
to conform to fiscal quarters or years because of the practical need for conforming
plans to accounting periods and then some. What arbitrary limitation of the long range
to three to five years is usually based as has been indicated on the prevailing belief
that the degree of uncertainty over a long period makes planning of questionable
value (Pant and Wolf, 1999:45).

24
2.1.5 Role of Forecasting in Planning

Forecasting is an integral part of decision-making activities of management. An

organization establishes goals and objectives seek to predict the environmental
factors. The need for forecasting is increasing as management attempts to decrease its
dependence on change and become more scientific in dealing with its environment.
Since each area of organization is related to others. A good or bad forecast can affect
the entire organization. Planning or budgeting is not nearly forecasting although
forecasts from the basis of budgeting. Forecasting is the estimate of the future
environment within the company will operate. Budgeting or planning on the other
hand involves the determination of what should be done, how the goals may be
reached and what individual or units are to assume responsibility and be held
accountable.

2.1.6 Planning verses Forecasting

Planning is clearly district from forecasting. Forecasting one of the essential elements
of planning is a prediction of what will happen on the basis of certain assumption.
Planning is an attempt to determine what should happen and what will make it likely
to happen. A forecast is not a plan, rather it is a statement of land or quantified
assessment of future conditions about a particular subject (sales revenue) based on
one of more explicit assumption. A forecast should be viewed as only one input into
the development of a sales plan. The management of a company may accept
modify or eject the forecast. In contrast a sales plan incorporates management
decision that are based on the forecast, other inputs and management judgment about
such related items as sales volume, price, production and sales, effort and financing
(Welsch, et al., 2001:109).

2.1.7 Purpose of Profit Planning

Some purposes for the application of profit planning are:

• To state the firms’ expectations in clear and facilitate for attainability.

• To communicate expectations to all concerned with the management of the
firm so that they are understood, supported and implanted.
• To provide a detail plan of action for reducing uncertainty and for the proper
direction of individual and group efforts to achieve goals.

25
• To coordinate the activities and efforts in such as way the use of resource in
maximized.
• To provide a means of measuring the performance of individuals and units and
to supply information on the basis of which the necessary corrective action
can be taken.

2.1.8 Long Range and Short-Range Profit Plan

There are two types of profit plans developed; one strategic (long-range) and another
tactical (short-range). The former profit plan takes a time horizon of 5 to 20 years and
the later for short period. The long-range planning is a picture of more summary data.
A part of this plan is more or less informal as presented by tentative commitments
made by the executive committee in the organizational planning seasons. The
formal portion of long-range profit plan includes the following component detailed by
each year.

• Income Statement
• Balance Sheet
• Capital Expenditure Plan
• Personnel Requirements
• Research Plan and
• Long Range Market Penetration Plan

Thus, the long-range profit plan covers all the key areas of anticipated activity; sales,
expenses, research and development, capital expenditure, cash, profit and return on
investment. The short-range tactical profit plan shows the primarily annual results, the
detail by months, responsibility and products. In an organization these annual
summaries should be prepared to provide a general understanding of the profit plan
and to provide an overall view of the comprehensive short range profit plan.

It is possible for the firms to develop these two profit plans for all aspects of the
operations. Assuming participatory planning and receipt of the executive instruments,
the manager of each responsibility center will immediately initiate activities within
his or her responsibility center to develop strategic profit plan and tactical profit
plan. Certain format and normally the financial function should establish the general
format, amount of detail, and other relevant procedural and format requirements
essentially for aggregation of the plan. All these activities must be coordinating

26
among the centers in conformity with the organization structure (Welsch, et al.,
2001:523).

2.1.9 Budgeting and Budget

Budgeting is a forward planning and involves the preparation in advance for the
quantitative as well as financial statement in indicate the intention of the management
in respect of the various aspects of the business. A budget is a comprehensive and
coordinated plan expressed in financial term for the operation and source of an
enterprise for some specific period in the future (Pandey, 1991:98).

Budget is defined as a comprehensive and coordinated plan, expressed in financial

terms for the operations and resources of enterprises for some specified period in the
future (Fregmen, 1976:256).

According to his definition the essential elements of a budget are:

 Plan
 Operations and Resources

 Financial Terms

 Specified Future Period

 Comprehensiveness

 Co-operation

Therefore, we can say that budget is a tool, which may be used by the management in
planning the future course of action-and in controlling the actual performance.
2.1.10 Budgeting: As a Device of Profit plan

Budgeting is a forward planning. It serves basically as a device (tool) for

management, control; it is rather pivot of any effective scheme of control. Budgeting
is the principal tool of planning and control offered to management by accounting
functions (Welsch, et al., 2001:346).

The prime objective of budgeting is to assist in systematic planning and in controlling

the operations of the enterprises. In fact, budgeting is best sources of communication

27
and an important tool in the hands of management. Since, budgeting deals with
fundamental policies and objectives, it is prepared by top management. A formal
budget by itself will not ensure that a firm's operations will be automatically geared to
the achievement of the goals set in the budget. For this to happen, the top-level
managers and lower-level employees have to understand the goals and support
them and co-ordinate their efforts to attain them.

2.1.11 Essential and Effective Planning

An effective budgeting system should have some essential feature to ensure best
results. The following are the chief characteristics of an effective budgeting.

2.1.12 Fundamental of PPC

Comprehensively profit planning and control is one of the more important approaches
that has been developed to facilitate effective performance of the management
process. The concepts and techniques of PPC have wide application in individual
business enterprises, government units, charitable organizations and virtually all
group endeavors. "The fundamental concepts of PPC include the underlying
activities or tasks that must be carried out to attain maximum usefulness from PPC.
The fundamentals of PPC are (Welsch, et al., 2001:235):
 A management process that includes planning organizing, leading and
controlling.
 A managerial commitment to effective management participation by all
levels in the entity.
 An organization structure that clearly specifies assignments of
management authority and responsibility at all organization levels.
 A management planning process.

 A management control process.

 Continuous and consistent co-ordination of all the management functions.

 Continuous feed forward, feedback, follow up, and re-planning through
defined communication channels (both downward and upward).
 A strategic profit plans.

 A tactical profit plans.

28
 A responsibility accounting system.

 A continuous use of the exception principle.

 A behavior management program

2.1.13 Profit planning and Control Process

A PPC program includes more than the traditional idea of a periodic or master
budget. Rather, it encompasses the application of a number of related
management concepts through a variety of approaches techniques and sequential
steps. These steps are out lined in this study in the following manner.

Identification and Evaluation of External Variables

The variable identification phase of the PPC process focuses on (1) identifying and
(2) evaluating the effects of the external variables. Management planning must focus
on how to manipulate controllable variables and how to work with the existing
situation of non-controllable variables. Variables, which have a direct and significant
impact on the enterprises, are called relevant variables. Variables may have their
different relevancy according to the market nature. For the enterprises purpose the
external relevant variables are, population,
G.N.P. competitive activities product line, and industry sales. And so far, internal
variables are concerned employees, capital, research productivity, pricing, operating
costs, advertisements etc. A particularly significant phase of this analysis
includes an evaluation of the present strength and weakness of the enterprises. The
comprehensive PPC approach is based on the expectation that these significant
aspects of operations will be critically analyzed and evaluated periodically and in an
orderly manner (Welsch, et al., 2001:235).
Development for the Board Objectives of the Enterprises

Development of the broad objectives of the enterprises is a responsibility of executive

management. Based on a realistic evaluation of the relevant variables and an
assessment of the strength and weakness of the organization, executive
management, can specify or restate this phase of the PPC process.
The statement of broad objectives should express the mission, vision and ethnical
character of the enterprise. Its purpose is to provide enterprise identify continuity of
purpose is to provide and identification. One research study listed the purpose of the

29
statement essentially as follows.
 To define of the purpose of the Co.

 To clarify the philosophy character of the Co.

 To create particular climate with in the business.

 To set down a guide for managers so that the decisions they make
will reflect the best interest of the business with fairness and justice to those
concerned.

Preparation and Evaluation of Projects Plans

Periodic plans and project plans are different in feature and functions. It will be
recalled that project plans encompass different time horizons because each project
has a unique time dimension, they encompass such items as plans for
improvements of present, products, view and expanded physical facilities, entrance
in to new industrial unit from products and industries and new technology and
other major activities that can be separately identified for planning purpose. The
nature of projects is such that they must be planned as separate units.

Implementation of Profit Plans

That profit plans strategies should be implemented by every level management is an

accepted norm. Implementation of management plans that have been developed and
approved in the planning process, involves the management functions of leading
subordinates in attaining enterprises objectives and goals. Thus, effective
management at all levels requires that enterprises objectives, goals, strategies, and
policy to be communicated and understood by subordinates. There are many facets
involved in management leadership. However, the comprehensive PPC program
may aid substantially in performing this function, plans, strategies and policies
foundation for effective communication. The plan should have been developed with
the managerial conviction that they are going to be met or exceeded in all major
respects. If these principles are effective in the development process, the various
effective and supervisor will have a clear understanding of their responsibilities and
the expected level of performance.

Use of Periodic Performance Reports

30
Only implementing the strategy will be on no meaning when the implementation is
not checked and trial whether used appropriately. So that the significance has been
raised that monthly and three- m o n t h l y performance reports are to be prepared.

2.1.14 Basic Assumption and Limitations of Profit plan

Profit planning systems are more common in business organizations and non-
business organization. But there are so many assumptions of using profit- planning
program. Firstly, the basic plans of the business must be measured in items of
money, if there is to be any assurance that many will be available for the needs of the
business. Secondly, it is possible to plan for the future of a business in a
comprehensive way, coordinating every aspect of the business, with every other
aspect to establish optimum profits goals. Thirdly, profit planning is preplanning not
merely what to do if things work out as forecasted, but also what to do if things
work out differently from the forecast. In developing and using a profit
planning and control (PPC) program, the following limitations should consider:
 Profit plan is based on estimates.
 A PPC program must be continually adapted to fit changing circumstances.
 Execution of a profit plan will not occur automatically the profit plan is not
a substitute for management.
2.1.15 Development of Profit Plan

Development of profit plan in commercial Bank begins with the preparation of

various functional budgets. Those functional budgets are in fact the picture of
various activities of the Bank to be performed during a particular period of time.
Therefore, the functional budgets of a Bank are activity based such as budget for
deposit collection, budget for lending and investments, budget for non-fund-based
business, budgets for expenditures and revenues. The development of profit plans
process that involves managerial decisions and ideally a high level of management
participation. The following are the budgets, which are developed in a bank while
making a profit plan.

2.1.16 Resources Mobilization plan or Budget

Planning for resources mobilization is the foundation for planning in a bank. The all-
other planning is based on it. The major and the sustainable resource of a bank are
the customer deposits. Therefore, the plan for resources mobilization has a primary

31
focus on the customer deposit mobilization. The lending and investment activities are
depended on the deposit mobilized by the Bank. So, the deposit mobilization or
collection plan is the starting point in preparing the other different plan.

Budgeted targets for deposit mobilization during a particular year is set in advance
with each view of optimizing the cost of deposit and the same are allocated to the
different branches of the banks. Such allocations may be regarded as the tactical plan
for deposit mobilization of the banks. Banks resources other than customer
deposits are the borrowing from other banks and the capital fund. Generally, banks
borrow from other banks to meet temporary requirement of liquidity which may
occur, sometimes, during the occurs of banking operation caused due to unexpected
withdrawals of deposit or deferment in loan repayments by the borrower by some
reason or other. Such activities are managed from the Head Office with the least
possible cost.

Among the capital fund, the equity capital is formed generally one time during
opening of the bank. The central bank (NRB) may from time to time instruct the bank
to enhance the paid-up capital to improve the capital adequacy of the bank.

2.1.17 Resource Deployment Plan or Budget

Planning for development of resources starts from assessment of nature of resources

to be mobilized. That is the assets are allocated on the basis of the nature of resources.
This approach of deployment of resources is called asset allocation approach. The
fundamental criterion which must be followed in allocating funds for acquiring
different types of assets is that the velocity- turnover rate of different sources of
supply of fund determines the appropriate maturity of the assets acquired through
fund utilization, for instance while relatively stable fund, like saving deposits, fixed
deposits and paid up capital could be used to buy long dated high yielding securities,
demand deposit which are more volatile, could be used to acquire relatively liquid
assets like cash or money at call and short notice on which little or no return is made
by the bank (Vaish, 1996:365).

Funds kept as cash in vault and as balance with NRB and other banks in current
account are the most liquid assets of the bank. Normally banks have to maintain
certain fixed percentage of their deposit liability in this form as directed by the
Central Bank from time to time. There is no yield in the fund deployed as liquid

32
assets.

2.1.18 Planning for Non-funded Business Activities

Other activities of commercial banks where it does not have to involve its fund yet it
can generate other income are called non-funded business activities of the Bank. They
are usually letter of credit and Bank guarantee issuance business of the bank where
the bank undertakes payment liabilities, which are contingent in nature and the banks
charges certain percentage of commission on such transaction to their client were
availing these facilities from the bank. The bank fixes annual target for such business
and those are allocated to the branches of the bank.

Expenditure Planning

Express planning and controlling are very necessary for supporting the objectives
and planned programs of the firm. An expense is related with profit. It is real fact,
that the minimization of cost is maximization profit. So, the expenses must be
planned carefully for developing a profit plan. In a Bank there are generally
following types of expenses:
 Interest Expenses
 Personnel Expenses
 Office Operating Expenses
 Expenses meeting the loss in Exchange Fluctuation
 Non-operating expenses
 Expenses for provision for loan loss
 Expenses for provision for staff bonus
 Expenses for provision of income tax

The interest expenses are incurred while paying for the deposit mobilized by the
bank and include the expenses incurred for interest payment in all kinds of interest-
bearing deposit as per the agreed rate between the bank and the borrower. In the total
expenses of a bank, the portion of interest expenses is quite higher. Therefore, the
expenses are categorized into interest expenses and other expenses while the later
includes other expenses as mention above except the interest expense.

Revenue Plan

33
Revenue of a bank is generated from the income yielding activities of the bank.
Therefore, while preparing the resources deployment plan and non-funded business
activities plan, the banks make the estimation of the revenue in advance during the
period for which the plan is developed. Revenues of a bank are generated in the
following forms:
 Interest income
 Commission and discounts
 Dividend
 Other income
 Foreign exchange income
 Non-operating income

Generally, the interest income of a commercial bank holds a major portion in

total revenue of the bank and it provides the major source of earning of a bank.
Therefore, total income of a bank is categorized in two types viz. interest income
and other income, while the later including other income items as listed above
except the interest income.

The interest income is earned by charging interest on the fund deployed in interest
earning assets such as loan and advances, overdraft, investments in
government securities, debentures etc. For this study, the income from Bills
discounting has also been treated as interest income, as we consider loans
overdraft and bills discounting together as a single asset portfolio as LDO.

2.1.19 Implementation of Profit Plan

Development of an annual profit plan ends with the planned income statement, the
balance sheet and the planned statement of changes in financial position. These
three statements summaries and integrate the details of plans developed by
management for the period. They also report the primary impact of detailed plans
on the financial characteristics of the firm. Before redistributing the completed profit
plan, it is general desirable to recast certain budget schedules so that technical
accounting mechanics and jargon are avoided as much as possible.

2.1.20 Performance Report

A performance report is a document that a company creates to define and measure its

34
overall success. It provides an overview of how the business is performing. To do
this, performance reports mainly collect specific work performance data, analyze it,
and provide suggestions to help in making decisions.
This report can narrow down and concentrate on the performance of a specific project
or an employee or focus on the entire business itself.
Performance reporting is an important part of a comprehensive PPC system. Its
phase of a comprehensive PPC program significantly influences the extent to which
the organization's planned goals and objectives are attained. Performance reports
deal with control aspect of PPC. The control function of management defined
as the action necessary to assure the objectives plans, policies and standards are
being attended. Performance reports are one of the vital tools of management to
exercise its control function effectively.

Special external reports, reports to owner and internal reports are specially presented
in the organization. Performance reports include in internal reports groups. It is
usually prepared on a monthly basis and follows a standardized format. Such
reports are designed to facilitate internal control by management. Fundamentally
actual results of reports are compared with goals and budget plans. Frequently they
identify problems that require special attention since these reports are prepared to
pinpoint both efficient and inefficient performance.

Features of Performance Report

In comprehensive PPC, performance report is very important. The main objective of

performance reports is the communication of performance measurement, actual
results and the related variances. Performance reports offer management essential
insights in to all the facts of operational efficiencies. Performance reports should be:
 Tailored to the organizational structure and focus of controllability (that is
by responsibility centers).
 Designed to implement the management by exception principle.

 Repetitive and related to short term period.

 Adapted to the requirements of the primary users.

 Simple understandable and reports only essential information.

 Accurate and designed to pinpoint significant distinctions.

35
 Prepared and presently promptly.

 Constructive in tone.
Aspect of Performance Report

The various managers use their performance reports depends on many factors,
some behavioral and some technical. One important factor is the extent to while the
performance reports serve the management and decisions making needs of the users.
Top management needs reports that give a complete and readily comprehensive
summary of the overall aspects of operations and identification of major events.
Middle management needs summary data as well as detailed data on day-to-day
operation. Similarly lower- l e v e l management needs reports that must be detailed,
simple understandable and limited to items having a direct bearing on the supervisor's
operational responsibilities.

2.1.21 Concept of Commercial Banks

The term 'Bank', signifies the place where we keep our money for safe keeping as
well as for earning some interest or the place from where we borrow money as
loan. As regard to the borrowing money from the Bank, we may consider its
function as that of money lender in our society. But a bank a moneylender is
different in the sense that the former lends the money which is principally collected
from their depositors while later does so from its own resources. The Random
House Dictionary of the English Language defines the bank as an institution for
receiving money and is some cases, issuing notes and transiting other financial
business (Decoster and Schafer, 1985:29).

2.1.22 Evolution of Commercial Banks

The world 'Bank' is derived from the word 'Banco', "Bancus' or 'Banque' all meaning
to a bench. This refers that early banker transacted their money lending activities on
banches in the marketplace exhibiting the coins of different countries in different
denominations for the purpose of changing and or lending money. Some writers
are of the opinion that the word 'Bank' came from the German word 'Banc' meaning
joint stock fund (Besley, 1987:169).

The goldsmiths can be considered as the initial Bankers in England as they used
to keep strong rooms with watchmen employed. People entrusted their cash to them.
The goldsmiths used to issue duly signed receipt of the deposits with the undertaking
36
to return the money on demand charging some fee for safe keeping. These
undertaking helped in gaining a further confidence of the public therefore the money
were kept with them for longer periods. They were thereby encouraged to lend some
part of these funds, which became profitable business to them. Therefore, they
started offering interest on the deposits to attract more funds. In the course of time
independent banking concerned were set up. The Bank of England was established in
1694, under a special Royal Charter. Further in 1833 legislative sanction was
granted for establishment of joint stock banks in London, which served as a big
impetus to the development of joint stock banking. These banks took the initiative
for extending current account facilities and also introduced the facilities of
withdrawals through cheques.

In India, the ancient Hindu scriptures refer to the money lending activities in the
Vedic period. During the Ramayana and Mahabharata eras, banking had become a
full-fledged business activity and during the smiriti period (after the Vedic period),
the business of Banking was carried on by the members of Vanish community.
Manu, the great law giver of the time speaks of the earning of interest as the
business of Bishyas. The bankers in the Smriti period performed most of those
functions which the banks in modern times performs such as the accepting
of deposits, granting loans, acting as the treasurer, granting loans to the king in times
of grave arises and banker to the state and issuing and managing the currency of the
country ((Khan and Jain, 1993:183).

Afterward, various commercial banks were opened with foreign joint venture under
private sectors in Nepal which had contributed a lot to bring the commercial banking
at present day position. Nepal Bangladesh Bank has established in the year 2051 B.S.

2.1.13 Role of Commercial Banks in Development of Economy

Commercial Banks play an important role in facilitating the affairs of the economy
in various ways. The operations of commercial Banks record the economic pulse of
the country. The size and composition of their transaction reflect the economic
happening in the country. Commercial Banks have played a vital role in giving the
direction in economic growth over the time by financing the requirement of
industries and trade in the country. By encouraging thrift among the people, banks
have fostered the

37
 process of capital formation in the country. In the context of
deposit mobilization, commercial banks induce the savers to hold their savings in
the form of bank deposits thus help bringing the scattered resources into the
organized banking sector which can be allocated to the different economic
activities. In his way they help in country's capital assets formation. Through their
advances, banks also help the creation of income out of which further saving by the
community and further growth potentials emerge for the good of the economy. In a
planned economy, banks make the entire planned productive process possible by
providing funds to the public sector, joint sector or private sector for any type of
organization. All employment income distribution and other objectives of the plan
as far as possible subsumed into the production plan which banks finance
(Gitman, 1990:265).
2.2 Review of Related Studies
2.2.1 Review of Journal and Articles
Shrestha, (2008), published an article on “Current Profit Planning Premises Adopted
and its Effectiveness in Commercial Banks” has included the significance and the
importance of profit planning in Nepal or should say for developing countries. He has
pointed out the fact that profit planning is a very important tool for the economic
development. He has also mentioned the contribution of profit planning to the GNP of
the nation. Year by year the contribution to GNP has been increased. He has
compared profit planning with the foreign direct investment. Researcher has
concluded that profit planning’s and grants are claimed as an important source of
increasing foreign exchange earnings in Nepal, Moreover, profit planning’s may be a
dependable source of national income for economic development if there is job
guarantee for the workers with the wage level equivalent to the residence of the
foreign country.

Karki, (2011), published an article on “Profit planning of BOK Bank” which is one
of the leading banks in Nepal. In this research researcher has concluded that
profit has driven the nation’s economy. Though there was a very difficult situation in
Nepal, profit planning has been able to hold the economy of the country. Because of
the huge increment in the profit planning received by Nepal, GDP of the nation was
stable, moreover say slightly increased at a severe time in the history of Nepal,
where there was an internal dispute in country. Therefore, researched has concluded

38
that profit planning is a very important tool to drive the nation’s economy. Moreover,
they have mentioned that profit planning is very important tool for the development
countries like Nepal. The trend analysis conducted in term of profit planning received
by Nepal clearly showed that the growth rates of profit planning are increasing day by
day. As we can see in the present scenario that many people are migrating. Moreover,
many people age between 18 t0 40 have been migrating abroad in the search of
opportunity. So, day by day the numbers of migrating people are also increasing and
the day by day the amount of profit planning received by Nepal have been increasing.
As per the trend analysis, we expect NPR 110 Bio of profit planning in Nepal.
Looking to the increment of profit planning flow in Nepal, it won’t be a dramatic
word if we say the profit planning would be reached to NPR 200 BIO in fiscal year
2008.

Shakya, (2012), published an article on “A Comparative Study on Profit Planning in

the context of Particularly Commercial Banks” using two rounds of nationally
representative household survey data in this study, the authors measure the impact on
poverty in Nepal of local and international migration for work. They apply an
instrumental variable approach to deal with nonrandom selection of migrants and
simulate various scenarios for the different levels of work-related migration,
comparing observed and counter factual household expenditure distribution. The
results indicate that one-fifth of the poverty reduction in Nepal occurring between
1995 and 2004 can be attributed to increased levels of work-related migration and
profit planning’s sent home. The authors also show that while the increase in work
migration abroad was the leading cause of this poverty reduction, internal migration
also played an important role. The findings show that strategies for economic growth
and poverty reduction in Nepal should consider aspects of the dynamics of
domestic and international migration.

Robbins and Edward, (2014), in this article “Profit Planning and the Finance
Function “explained that the attention given to profit-planning in the literature on
business finance does to reflect its importance to the financial activities of the
modern business firm. For this reason, at least in part, we feel that students of
finance have not made the contribution to this area of analysis that is justified but
their background and interests. In order to sustain this position, we endeavor in this
paper to evaluate the importance of the profit-planning aspects of the finance

39
function as practice in business today to discuss some tools of profit-planning,
particularly the break-even point which are often employed but business firms in their
financial analyses and finally to demonstrate the relationship between the individual-
product and over-all break-even points in order both to clarify this problem and to
show how the application of some simple analytic techniques may improve the
results of accounting presentations.

Harris, (2015), in this article “Profit Planning for Hospitality and Tourism
“published in Scandinavian Journal of Hospitality and Tourism with a focus on the
Hospitality and Tourism (H&T) industry. The purpose of the article is to provide
H&T students and professionals with a guide to the application of key managerial
accounting techniques in planning, controlling and improving profitability at the
business property level. The article emphasizes how to apply managerial accounting
techniques in practical, day to day, profit management new research and development
applicable to practitioners in the H&T sector. Major additions include new chapters
on the profit and panning framework comparing and benchmarking operating
results and customer profitability analysis.

Adesina, (2016), had published an article on “Accounting Information and Profit

Planning” stated the relationship between accounting information and profitability of
listed companies with a particular reference to the listed manufacturing companies in
Nigeria from where a total sample of 222 top management staff were drawn using
stratified and purposeful sampling techniques. Independent variables captured in the
study were cost information, sales information and marketing information while the
dependent variable was profitability. The results indicate that a positive significant
relationship exists between accounting information and profitability of
manufacturing organization. It is therefore recommended that functioning accounting
system should be put in place by the manufacturing organization to enable them
actualize their profit target.

2.2.2 Review of thesis

Maharjan, (2011), had conducted a study on the topic “Profit Planning in a

Commercial Bank (With Reference to Standard Chartered Bank Nepal Ltd.)”.

The Major Objective were:

40
 To highlight the current profit-planning premises adopted and its
effectiveness in Standard Chartered Bank Nepal Ltd.
 To analyze the variance of budgeted and actual achievements

 To study the growth of the business of the Bank over the period.

 To make necessary suggestions and recommendations.

The Major findings were:

 The decision-making process is highly centralized however, management

takes the feed forwards for annual planning and strategy building through manager
conferences and strategy building through manager conferences and strategic
meeting organized twice in every year at the head office.
 Interest expenses amount is the highest among total expense items of
the bank every year.
 The total deposit of the bank is found increasing every year corresponding to
the increase in interest expenses the total deposit is perfectly and positively
correlated with total interest expenses.

Pandey, (2012), had conducted a study on the topic “A Comparative study on Profit
Planning of Commercial Banks (With Reference to BOK and NBL).”

The Major Objective were:

 To highlight the current profit planning premises adopted and its effectiveness
in NABIL and BOK. To analyze the variance of budgeted and actual
achievements.
 To study the growth of the business of the Banks over the period.

 To provide suggestion and recommendations for improvements of the overall

profitability of the banks.
 This shows that overall efficiency of the SC Bank and better utilization of
total resources available is higher and strong.

The Major findings were:

 The both banks are fluctuating rate over the study period, but in the FY
2010/11 is negative growth of BOK L by -1.54% (on the basis of FY

41
2007/08).
 Comparatively BOK is good position than NABIL. From the average growth
rate i.e., 16.08% > 14.11% respectively.
 Expenditure of the both banks are increasing trend but in the FY 2009/10 of
BOK and FY 2008/09 of BOK is decreased. In comparatively more increasing
trend in the NABIL than BOK.
Bhattrai, (2013), had conducted a study on the topic "The sales budget of
Manufacturing Public Enterprises".

The Main Objective were:

 To evaluate the variance between standard and actual result.

 To comparison of sales with profit of the HPPCL.

 To provide suggestion and possible guidelines to improve investment policy

and its problems.

The Major findings were:

 Actual sales are very below than the budgets sales.

 Sales forecasting is not based on realistic ground. HPPCL only use the sales
force composite method in sales forecasting but it has not practice of using
statistical techniques in sales forecasting.
 Net profit of the bank is the amount, which is obtained by subtracting the
amount of the net burden from the amount of gross interest margin.
 To analyze the sales budget prepared by HPPCL.

Acharya, (2014), had conducted a study on the topic “Analysis of Profit Planning
Procedure of commercial Ban (With Reference to Nepal SBI Bank Ltd.)”.

The Main Objective were:

 To observe Nepal SBI’s profit planning based on overall budgets by the

bank.
 To analyze the variance of budgeted allocation and actual achievements.

 TO study the growth of the business of the bank over the period.

42
 To provide suggestion and recommendation for improvements of the overall
profitability of the bank.

The Major findings were:

 NSBI has followed profit plan at different component.

 NSBI performs SWOT analysis before prepare of profit plan.

 NSBI has three types of core planning team to make plan, policy, program
and budget.
 NSBI is well performing in the deposit collection.

Pandey, (2015), had conducted a study on the topic “Profit Planning of Nabil Bank
Limited.”

The Main Objective were:

 To find out the relationships between total investment loan and advances,
deposit, net profit and outside assets.
 To identify the investment priority sectors of commercial Bank

 To analyze and forecast the trend and structure of deposit utilization and its
projection or five years of Commercial Bank.

The Major findings were:

 The study is conducted on profit planning of Nabil Bank, which is one of

the leading banks in Nepal. NABIL has been maintaining a steady growth rate
over this period.
 NABIL has earned a net profit of Rs 747 million for the fiscal year
2013/14 and this comes to be 10.83% more as compared to the
same period in the previous fiscal year.
 Correlation between interest expenses and deposit of NABIL is negative, it
shows there is no relation between interest expenses and deposit but
it is not possible. So, NABIL should increase its cost of deposit rate.
2.3 Research Gap
Research gap refers to the gap between previous research and this research. There is
research gap between the present study and previous studies. This study has

43
analyzed the financial position of MBL by applying the tools of ratio analysis and
statistical tools. It concludes the various findings of research and recommendations to
the MBL. Most of the past research studies about profit planning system are
basically related to profit planning system of manufacturing sectors or
production-oriented activities. The researcher found only few studies so far that has
been related to profit planning system of a commercial bank i.e., Machapuchhre Bank
Limited Nepal. All the past research has pointed out that there is no proper profit
planning system and recommend for the effective implementation of profit planning
system in the concerned institutions. This study has used latest data for analysis of
profit planning of MBL.

44
 CHAPTER – III
METHODOLOGY
3.1 Introduction
Research methodology is the way to solve systematically about the research problem
(Kothari, 1990:39). Research methodology is the procedure of planned outline which
deals with research design, data collection procedure, nature of data, identify the
population, making confidence of the sampling method and sampling variables, data
selecting styles, presentation style of collected information data and interpreting it.
Now, no doubtingly it is obvious that the research methodology is helpful to attain the
objectives of the research. This study mainly concentrated on the profit planning of
Machhapuchhre Bank Ltd. Research methodology, therefore, is designed and
implemented to study about the sources, causes and methods of profit planning. The
analysis is income, expenses, loan, deposit, employee status of MBL.
Research methodology refers to the various sequential steps to be adopted by a
researcher in studying a problem with certain objectives in view. In other words,
research methodology describes the methods and process applied in the entire subject
of the study.

Research methodology depends upon the various aspects of the research project. The
main objectives of this thesis are however to examine and analyze the profit planning
and control system adopted by Machhapuchhre Bank Ltd.

Besides this thesis is also means for analyzing the position of deposit, loan recoding
and investment policy and to provide the appropriate suggestion and recommendation.

Thus, the researcher has tried to undergo the following methodology for the
evaluation of various aspects of financial position of Machapuchhre Bank Ltd.

3.2 Research Design

Research design is that outline which configures the collection and analysis style of
the data and information. Research design is a plan of structure and strategy of
investigation conceived so as to obtain answer to research questions and to control
variance.(Kothari, 1997) Descriptive research is process of accumulating facts. It does
not necessarily seek to explain relationship and test hypothesis make predictions or
get at meaning and implications of a study (Wolf and Pant, 2002:81). Analytical
method is used to present information and data. A part from this, there is also
45
qualitative aspect and these aspects are described in word detail wherever it is
necessary.

The first step of the study is to collect necessary information and data concerning the
study. Research design means the definite procedure and techniques which guides the
study and propounds ways or doing research. The research has its basic objective to
highlight the degree of application of profit planning concept in MBL with respect to
planned prediction and actual production, degree of sales realization in respect to
budget figure and examine the cost structure. This study is an examination and
evaluation of the budget process of profit planning program of MBL various related
information. Functional budget and statement of MBL are tools to analysis and
evaluated the profit planning system of MBL. Also, to figure out the problems and
provides them with some recommendation.

3.3 The population and sample

This research work is designed with profit planning and control is Nepalese
commercial bank. The total number commercial bank in Nepal is the population of the
study. Among the total population of Machhapuchhre Bank Limited has been chosen
randomly for case study purpose.

3.4 Period Covered

Profit planning has two-timed dimension long rage and short range. This study covers
a time five year from 2073/2074/075/076/077 data are taken from MBL and the
analysis is basically made a based on these 5 years data. To the analysis of short-range
tactical profit plan analysis data are taken from fiscal year 2072/073. Strategic or
long-range trend are taken from fiscal year 2072/073 to 2077/078.

3.5 Nature and source of Data Collection

For any research work, information is the lifeblood. Therefore, it is the major task to
gather the information and data collection. Mostly secondary data has been used in the
study. It has been collected from the following sources:

 Published annual financial reports of MBL.

 Publication of Nepal Rastra Bank, publication of National Planning Central

Bureau of Statistics and related publication.

 Books, booklets, articles, magazines, and official records of MBL.

46
 Previous dissertations, electronic media such as websites.

 Published and unpublished document related to MBL.

3.6 Data collection procedures
Secondary data have been collected from the annual published accounting and
financial statement of MBL. Similarly, other necessary data have collected from
publication of the Nepal Rastra Bank publications of national planning commissions
central bureau of statics and related publications.

3.7 Statistical Tools Used

Data collected from various sources are managed, analyzed and presented in proper
tables and formats. Such formats and tables are interpreted and explained wherever
necessary.

To analyze the collect data financial and statistical tool are used the financial tools
mainly used are financial ratio. CVP analysis and flexible budget similarly the
statistical tools used are mean correlation regression, time series, coefficient of
variance standard deviation, graphs diagrams etc.

3.8 Research Variables

Loan disbursements, deposit collection, capacity utilization, profit and loss, total
assets total capital employed, capital expenditure outstanding balance of letter of
credit and bank guarantees and cash flow relating to short term and long-term periods
of MBL are the research variable of the present study.

3.9 Research Methodology

This study will be confined to examine the profit planning and control of MBL bank
wherever financial, mathematical, and statistical tools will be used to analysis the
presented data which will includes ratio analysis is percentage, regression analysis,
test of goodness of fit of the regression estimate (r2) correlation mean standard
deviation, coefficient of variance etc.

3.10 Financial Tools

Financial analysis is the process of identifying the financial strengths and weaknesses
of the organization by properly establishing relationships between the items of the
balance sheet and the profit and loss account. Ratio analysis is a powerful tool of
financial analysis. A ration is designed as “the indicated quotient of two mathematical
expressions” and as “the relationship between two or more things”. In financial
analysis, ratio is used as a benchmark for evaluating the financial position and

47
performance of a firm. Several ratios, calculated from the accounting data, can be
grouped into various classes according to the financial activity and function to be
evaluated.

(i) Net Profit Margin

The ratio signifies the effectiveness of expenses management and cost control and
gives the direction to the management for service pricing policies. It means how much
of total revenue has been declared as net profit after all the charges are over up. The
higher ratio means the management has been able to control its operational costs and
maintain efficiency.
Net Profit After Tax
Net Profit Margin =
Total Operating income

(ii) Return on total assets ratio (ROA)

The ratio is a primary indicator of managerial efficiency. It indicates how efficiently

the assets were utilized by the bank. The ratio measures how far the management has
utilized all the assets of the bank for profit generating activities. Higher ROA
indicates higher efficiency in the utilization of the total assets and vice versa.

Net Profit after tax

Return on Total Assets (ROA) =
Total assets

(iii) Return on Equity (ROE)

Equity refers to the owner’s claim of a bank. The excess amount of total asset over
outsiders’ liabilities is known as shareholder’s equity. It is also known as net worth.
This ratio measure how prudently the management has employed shareholder’s fund
keeping the interest of shareholders and maximize their net worth. It is the
measurement of the rate of return available to the bank’s shareholders. The ratio
provides the company to deliver a good return on equity. This ratio is calculated by
dividing net profit by total equity capital.

Net Profit after tax

Return on Equity (ROE) =
Total equity

(iv) Operating Efficiency Ratio

To maximize profitability and the value of the shareholder’s investments in the bank,
bank management must maintain efficiency in their operations. This usually means

48
reducing their operating expenses and increasing the productivity of their employees.
Since banks are to pay huge amount of the interest costs for their funds, they like to
reduce non-interest costs especially, staff costs, wages and overhead costs. Lower the
ratio means greater the success of management.

Total Operating Expenses

Operating Efficiency Ratio =
Total Operating Income

3.5.2 Accounting tools

i. Contribution Margin (CM)

The difference between production amount and variable cost is known as the
contribution margin. In other words, fixed cost plus the amount of profit is equivalent
to contribution margin. Contribution margin can be expressed by

Contribution margin (CM) = Production volume (Sales) – variable cost

ii. Profit Volume Ratio(P/V)

It establishes a relationship between the contribution and production volume. The

factors profit and volume are interconnected and dependent with each other. Profit
depends upon contribution margin and production. It can be expressed by;

Contribution Margin
Profit volume ratio =
Production∨Sales

iii. Break-even Point

The point which breaks the total costs and selling price evenly to show the level of
output or production, at which there shall be neither profit nor loss, is regarded as
break-even point. Through contribution margin approach, break- even point can be
expressed by;

¿Cost
Break—even Point =
P /V ratio

iv. Break-even Ratio

Total sales revenue consists two parts: Break even sales and Margin of Safety. The
proportion of Break-even sales is BE Ratio.

Actual Sales = Break Even Sales + Margin of Safety

49
 Net Profit After Tax
BE Ratio =
Total Operating Income

v. Margin of Safety (MOS)

It is the difference between the actual sales revenue and the break-even sales revenue.
It can be expressed by;

Margin of Safety = Actual Production – Break Even Production

3.5.3 Statical Tools

Statistical tools are used to analyze the relationship between two or more variables
and to find how these variables are related. In this study, following statistical tools are
used.

i. Arithmetic Mean or Average

The arithmetic means or simple mean of set of observations in the sum of all the
observation divided by the number of observations. It is the best value, which
Represent to the whole group... means is the arithmetic average of a variable.
Arithmetic mean of a series is given by:

X 1 + X 2 + X 3 ............................ X n ∑ X
Mean = =
n n

Where, X denotes arithmetic mean, n denotes no. of periods and X 1 , X 2 and X 3 are
individual observations.

ii. Standard Deviation

The standard deviation is the absolute measure of dispersion in which the

drawback presents in other measure of dispersion as it satisfied most of the
requisites of a good measure of dispersion. Standard deviation is defined as the
positive square root of the mean as square of the deviation takes from the arithmetic
mean. It indicates the ranges and size of deviance from the middle or mean. It
measures the absolute dispersion. Higher the standard deviation Higher will be the
variability and vice versa. Dispersion measures the variation of the data from the
central value. In other words, it helps to analyze the quality of data regarding its

50
variability. It is calculated as:

Standard Deviation (S.D) =

√ ∑ (X −X̅ )2
N

iii. Co-efficient of Variation (C.V)

Standard deviation is the absolute measure of dispersion. The relative measure of

dispersing based on the standard deviation is known as the measurement of coefficient
of standard deviation. The percentage of measure of co-efficient of so is called
co-efficient of variation. Less CV is the more uniformity and consistency and vice
versa. Only standard deviation is not appropriate to compare two pairs of variables
but also CIS capable to compare two variables independently in terms of their
variability. It is calculated as under:
Standard Deviation
Coefficient of Variation (C.V.) =
Mean

iv. Coefficient of Correlation(r)

Correlation is a statistical tool design to measure the degree of association between

two or more variables. In other word if the changes in one variable affects the changes
in other variable, then the variable are said to be co-related when it is used to measure
the relationship between two variables, then it is called simple correlation. The
coefficient of correlation measures the degree of relationship between two sets of
figures. Among the various methods of finding out coefficient of correlation, Karl
Pearson's method is applied in the study. The result of coefficient of correlation is
always lying between +1 and -1. The formula for the calculation of coefficient of
correlation between X and Y is given below.
∑ x 1. x 2
Coefficient of Correlation:
√∑ X 2
1 X 22

v. Least Square Linear Trend Analysis

Trend analysis has been a very useful and commonly applied statistical tool to
forecast the future events in quantitative terms. On the basis of tendencies in the
dependent variables in the past periods, the future trend is predicted. This analysis
takes the historical data as the basis of forecasting. This method of forecasting the

51
future trend is based on the assumptions that the past tendencies of the variable are
repeated in the future or the past events affect the future events significantly the
future trend is forecasted by using the following formula.

Y= a+bx

Where,

Y = The dependent Variable

a = the origin i. e. arithmetic mean

b = the slope coefficient i. e. rate of change

X = the independent variable

vi. Hypothesis Test

For this study, t-test for significance of an observed and sample correlation
coefficient is used.
Null hypothesis (H₀); ρ = 0 i.e. There is no correlation between
Considered variables.

Alternative Hypothesis (H₁); ρ ≠ 0 i.e. There is significant correlation between the

considered variables.

Test statistic under H₀;

r
√1−r 2 √
t= × n−2

Where, r = Sample correlation between two variables

2
r = Sample correlation Coefficient

n = No of Pair of observations

Level of significance: Level of significance ∝ = 5%

Critical Value: Tabulated or critical value of t at ∝ % level of significance for (n -

2) degree of freedom obtains from ‘t’ tables.

Decision: If calculated ‘t’ is less than or equal to tabulated value of ‘t’ it falls in the
accepted region and the null hypothesis is accepted and if calculated ‘t’ is greater than
tabulated ‘t’ null hypothesis is rejected.

52
 CHAPTER - 4
DATA PRESENTATION AND ANALYSIS

This chapter includes analysis of data collection and their presentation. In this chapter,
the effort has been made of analyze profit planning of commercial bank. The chapter
data presentation and analysis are the main body of the study. The purpose of this
chapter is to analyze and elucidate the collected data to achieve the objective of the
study following conversion of unprocessed data to an understandable presentation.
In this course of analysis, data gathered from various sources have been inserted in
the tabular form and shown in diagram form. The data have been analyzed by using
financial and statistical tools. The results of the computation have also been
summarized in appropriated tables. On the background of various reading and
literature review in the preceding chapter, it is tried to analyze and diagnose the
recent Nepalese Commercial Bank, with taking a special reference with commercial
bank of Nepal. The samples of computation of each model have been included in
annexes. Among the listed commercial banks only one commercial bank is taken as
sample i.e., MBL. Different tables and figures (diagrams) are drawn to make the
result simpler and more understandable.
4.1 Analysis of Income
4.1.1 Income from Interest
Interest income is the amount of interest that has been earned during a specific time
period. This amount can be compared to the investments balance to estimate the
return on investment that a business is generating. It is the major sources of income of
bank. As income from interest is the main source of income of bank. It has to be very
aware while doing investment. Such income is classified under various heads or
source such as loan, overdraft, agency balance, investment etc.

Table 4. 1: Sector wise Income from interest

(In Lakhs)

53
Interest Income 2073/74 2074/75 2075/76 2076/77 2077/78
Cash and cash
equivalent 135.63 328.85 248.81 117.50 139.25
Due from Nepal - 6.99 121.71 - -
Rastra Bank
Placement with the
bank and financial 55.16 53.63 979.20 792.32 67.06
Institution
Loan and advance to
bank and financial 631.14 2,100.05 2,607.71 2,030.20 333.41
institution
Loans and Advance
to customers 48,697.32 71,492.28 93,048.20 103,912.65 101,938.51
Investment’s
securities 1,631.94 3,131.40 4,007.71 5,699.86 7,513.66
Loan and advance to
staff 379.05 550.36 761.89 976.36 1,562.93
Others - - - - -
Total 51,530.24 77,663.56 101,775.2 113,528.89 111,554.83
3
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 1: Total Interest Income

54
 Interest Income
120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

0.00
2073/074 2074/075 2075/076 2076/077 2077/078

Interest income

The above table 4.1 and figure 4.1 present that the total income from Rs. 51530.24 in
F/Y 2073/74, Rs. 77663.56 in F/Y 2074/75, Rs. 101775.23 in F/Y 2075/76,
Rs.113528.89 in F/Y 2076/77 and Rs.111554.83 lakhs in F/Y 2077/78. It means the
income from interest earn is in fluctuating trend.

4.1.2 Income from commission and Discount

It is another source of income generation. All commission’s income is booked at the

time of transaction. Whatever charge or commission has to take for service rendered,
customer has to debit at the time of transaction. Commission is received on LC,
remittance, annual fees on cards, etc.

Table 4. 2: Sector wise Income form Commission and Discount

(In Lakhs)

Particular 2073/74 2074/75 2075/76 2076/77 2077/78

Loan administration fees 1,773 1,807 1,968 2,300 2,937
Service fees 525 636 911 1,007 1,499
Consortium fees - 42 501 454 558
Commitment fees 213 261 230 48 26
DD/TT/Swift fees 104 124 175 175 192
Credit card/ATM issuance and
renewal fees 506 545 786 747 1,089

55
 Prepayment and swap fees 28 16 914 1,223 704
Investment banking fees - 13 19 24 70
Asset management fees - - - - -
Brokerage fees - - - - -
Remittance fees 261 320 396 479 452
Commission on letter of credit 292 397 415 814 967
Commission on guarantee
contracts issued 302 437 965 1,346 1,973
Commission on share
underwriting/issue - - - - -
Locker rental 44 53 77 122 96
Other fees and commission
income 459 260 548 736 865
Total fees and Commission
Income 4,508 4,911 7,905 9,475 11,429
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 2: Income from Commission and discount

Income from Commission and Discount

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0
2073/074 2074/075 2075/076 2076/077 2077/078

Income from Commission and Discount

The above table 4.2 and figure 4.2 show the income from commission and discount.
According to table and figure the total income from commission and discount are Rs.
4,508, Rs.4911, Rs.7905, Rs.9475 and Rs.11429 million in F/Y 2073/74, F/Y
2074/75, F/Y 2075/76, F/Y 2076/77 and F/Y 2077/78 respectively. It has
fluctuating trend during the five years study period.

56
4.1.3 Other Operating Income
Bank charge various service charges for providing services. It is also another source
of income such service can be renewable charges, vault and safe charge, stop
payments, Remittance etc. These amounts are little but help in bank’s income. The
following table shows the sundry income of MBL.
Table 4. 3: Other Operating Income

Particular 2073/74 2074/7 2075/76 2076/77 2077/78

5
Foreign exchange revaluation 19.48 57.45 228.39 560.62 385.09
gain
Gain/loss on sale of 9.39 - - - 1,083.37
investment securities
Fair value gain/loss on - - - -
investment properties -
Dividend on equity 14.75 17.63 32.07 -
instruments -
Gain/loss on sale of property (7.42) 14.30 20.92 44.81 356.68
and equipment
Gain/loss on sale of 936.51 0.01 - (8.35) (2.85)
investment property
Operating lease income - - - 104.22 141.57
Gain/loss on sale of gold and - - - - -
silver
Locker rent - - - - -
Other - 0.96 - - -
Total 972.71 90.34 281.39 701.29 1,963.87
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 3: Other Operating Income

57
 Other operating Income
2500

2000

1500

1000

500

0
2073/074 2074/075 2075/076 2076/077 2077/078

Other operating Income

The above table 4.3and figure 4.3 depict the income from other operating
income. According to table and figure the total income from operating income is
Rs. 972.71 lakh in F/Y 2073/74 then it slowly decreases to Rs. 90.34 Lakh in F/Y
2074/75. Similarly, it is Rs.281.39 Lakh in F/Y 2075/76. After that it also
increases to 701.29 Lakh in, 2076/77 and in final year i.e., F/Y2077/78, it increases to
193.87. It indicates that it is increasing trend.
4.1.4 Non-Operating Income

It is the income generated form non-operating activities of Bank. The following table
shows the non-Operating income of the company.
Table 4. 4: Non-Operating Income
(In Lakhs)
Particular 2073/7 2074/75 2075/76 2076/77 2077/78
4
Recovery of loan written 179.33 31.20 1,210.52 80.69 97.74
off
Other Income - - 8.51 - -
Total 179.33 31.20 1,219.03 80.69 97.74

(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 4 : Non-Operating Income

58
 Non- Operating Income
1400

1200

1000

800

600

400

200

0
2073/74 2074/75 2075/76 2076/77 2077/78

Non- Operating Income

The above table 4.4 and figure 4. reveal that non-Operating gain/loss is in
fluctuating trend throughout the study period. They are 179.33, 31.20, 1219.03 80.69
and 97.74 Lakhs in F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77 and
F/Y 2077/78 respectively.

4.2 Analysis of source of expense

4.2.1 Interest Expense

Bank not only makes income on various heads but also have to expense on it. Such
expenses can be personnel expenses, office expenses, interest etc. As bank take
interest on loan and overdrafts in same way it has to pay interest on deposits. Such
interest can be different according to nature of deposits.

Table 4. 5: Interest Expense

(In Lakhs)
Particular 2073/74 2074/75 2075/76 2076/77 2077/78
Due to bank and - - 2918.913 5918.667 738.2017
financial institutions
Due to Nepal Rastra 398.7355 197.4971 369.656 265.6501 348.0518
Bank
Deposits from 27462.96 49878.11 62253.11 65195.17 62881.25

59
 customers
Borrowing 48.66109 189.9551 735.9905 822.4905 992.4654
Debt securities - - - 2707.923 3079.936
issued
Subordinated - - - - -
liabilities
Other - - - - -
Total interest 27910.35 50265.57 66277.67 74909.9 68039.9
expense
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 5: Interest Expense

Interest Expense
80000

70000

60000

50000

40000

30000

20000

10000

0
2073/074 2074/075 2075/076 2076/077 2077/078

Interest Expense

The above table 4.5 and figure 4.5 describe the total interest expenses of Bank MBL.
In the F/Y 2073/74, it is Rs. 27910.35, in F/Y 2074/75, it increases to Rs. 50265.57.
After that it Increases to Rs.66277.67 in the F/Y 2075/76 and in F/Y 2076/77 it is Rs.

60
74909.9. Then it slowly decreases in F/Y 2077/78 i.e., Rs. 68039.9 Lakhs. Interest
expenses play vital role in profit hence it need proper planning to manage profit
each year. It indicates that the trend of interest expenses is in fluctuating trend.
4.2.2 Staff Expenses

Personnel expenses are that for employees of the office. Without employee’s work
cannot be done. These expenses are regarded as fixed cost such as salary, allowance,
uniform, medical and insurance etc.
Table 4. 6: Staff Expenses
(In Lakhs)

Particular 2073/74 2074/75 2075/76 2076/77 2077/78

Salary 2,105.74 2,607.61 3,158.54 3,924.83 4,863.71
Allowances 962.65 1,275.86 2,858.25 3,777.33 3,594.21
Gratuity expense 275.88 303.60 356.22 350.46 580.35
Provident fund 210.52 260.68 315.86 385.68 486.36
Uniform 106.92 128.79 163.97 102.53 291.23
Training & development 67.51 196.06 267.45 189.12 72.96
expense
Leave encashment 500.31 837.71 808.27 1,122.50 1,198.86
Medical - - - - -
Insurance 30.97 21.22 23.43 58.29 82.26
Employee’s incentive - - - - -
Cash-settled share-based - - - - -
payments
Pension expense - - - - -
Finance expense under 79.08 123.26 10.54 668.09 ,264.04
NFRSs
Other expenses related to 738.09 980.59 1,444.30 2,382.48 2,727.38
staff
a. Dashain allowance 247.99 293.63 474.67 615.43 696.15
b. Others 490.09 686.96 969.63 1,767.05 2,031.23
Subtotal 5,077.69 6,735.36 9,606.82 12,961.29 15,161.36
Employee’s bonus 1,860.35 2,011.03 2,696.99 2,067.80 2,533.71
Grand total 6,938.04 8,746.40 12,303.81 15,029.10 17,695.08

61
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 6: Staff Expense

Staff Expenses
20,000.00
18,000.00
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00
2073/074 2074/075 2075/076 2076/077 2077/078

Staff Expenses

The above table 4.5 and figure 4.6 highlight that the staff expenses are in increasing
trend of MBL. The total personnel expenses are 6,938.04, 8,746.40, 12,303.81,
15,029.10 and 17,695.08 million in in F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y
2076/77 and F/Y 2077/78 respectively. It shows how much amount spending on
employee salary, allowance, PF, training, etc.
4.2.3 Administrative Expenses

Bank purchase various goods & materials for daily operation and providing services
to the customers. It is also another source of expenses such expenses can be rent,
repair and maintenance, office equipment, stationary, advertisement Etc. The
following table shows the sundry expenses of MBL.

Table 4. 7: Other Operating Expenses

(In Lakhs)

Year Amount Amt. (in 000's)

2077/078 890,785,804 8,908
2076/077 888,437,218 8,884
2075/076 723,550,216 7,236
2074/075 419,489,928 4,195

62
 2073/074 472,474,573 4,725
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

Figure 4. 7:Admin. Expenses

Other Operating Expenses

10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2073/074 2074/075 2075/076 2076/077 2077/078

Other Operating expenses

The above table 4.7 and figure 4.7 represent those Other Operating expenses is in
increasing. The expenses are Rs. 4725, 4195, 7236, 8884 and 8908 Lakhs for the F/Y
2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77 and F/Y 2077/78 respectively.

Table 4. 8: Income Statement

Rs In Lakhs

S.N. Particular 2073/74 2074/75 2075/76 2076/77 2077/78

1 Interest Income 51,530.24 77,663.56 101,775.23 113,528.8 111,554.83
9
2 Commission & 4,5 4,910. 7,905 9,474. 11,429
Discount 08.45 69 .19 86 .02
Other Operating 90. 281 701 1,963
Income 972.71 34 .39 .29 .87
Net Trading 1,3 1,668. 3,033 2,821. 2,580
Income 13.05 03 .32 64 .88
Total Operating 58,324.4 84,332.6 112,995.1 126,526.69 127,528.5
Income 5 2 3 9
Less: 1,0 1,527. 1,171 5,879. 4,977

63
 Impairment 17.00 36 .71 24 .99
Charge/(reversa
l)
A Net Operating 57,3 82,805.2 111,823.4 120,647. 122,550.
Income 07.45 6 2 45 60
3 Less: variable
Cost
Interest 27,910.3 50,265.5 66,277.6 74,909.90 68,039.9
Expenses 5 7 7 0
Fee and 515. 699 1,006. 1,310
commission 464.73 69 .75 70 .43
expenses
Variable 2,627.0 3,261. 5,715 6,759. 6,622
Expenses 5 68 .92 19 .18
B Total variable 31,0 54,042.9 72,693 82,675. 75,972
Cost 02.14 4 .34 80 .51
C CM (A – B) 26,305.3 28,762.3 39,130.08 37,971.6 46,578.0
1 2 6 9
4 Less: Fixed Cost
Staff Expenses 6,938.0 8,746.4 12,303.8 15,029.1 17,695.0
4 0 1 0 8
Fixed Expenses 1,594.4 1,933.35 2,823.4 3,737.8 4,187.6
2 5 1 8
D Total Fixed 8,532.46 10,679.7 15,127.2 18,766.9 21,882.7
Cost 4 6 1 6
E Operating Profit 17,7 18,082.5 24,002 19,204. 24,695
(C – D) 72.85 8 .82 74 .33
5
Add: Non- 31. 1,219 80 97
Operating 179.33 20 .03 .69 .74
Income

64
 Less: Non- 14. 948 675 1,989
Operating - 48 .92 .20 .64
Expenses
F Total Sundry 16. 270 (594. (1,891.
Income 179.33 72 .11 51) 90)
G NPBT (E +F) 17,952.1 18,099.3 24,272.93 18,610.23 22,803.4
8 0 3
H Less: Tax
Net Tax 5,383.2 5,602.42 7,302.0 5,958.72 6,728.69
8 5
I Net Profit (G - 12,5 12,496.8 16,970 12,651. 16,074
H) 68.90 8 .88 51 .73
(Source: Annual Reports of MBL from F/Y 2073/74 to 2077/78)

The above table shows that the all variables of income statement like operating
income, variable cost, fixed cost, operating profit, net profit are in increasing trend.
The net profit of the bank are Rs. 12568.90, 12496.88, 16970.88, 12651.51 and
16074.73 million for the F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77 and
F/Y 2077/78 respectively. Similarly, the operating profit of the bank are also
increasing trend they are Rs. 17,772.85, Rs.18,082.58, Rs. 24,002.82, Rs.19,204.74
and Rs.24,695.33 million for the year F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y
2076/77 and F/Y 2077/78 respectively. It is shows in the following figure.

Figure 4. 8: Operating Profit and Net Profit

65
 Operating and Net Profit
30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2073/074 2074/075 2075/076 2076/077 2077/078

Operating Profit Net Profit

The above figure displays that the operating profit and net profit of the Bank are
in increasing trend except the fiscal year 2076/77.

Figure 4. 9 : Fixed cost and Variable cost

Fixed cost and Variable cost

90,000.00

80,000.00

70,000.00

60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

0.00
2073/074 2074/075 2075/076 2076/077 2077/078

Fixded cost Variable cost

The above figure 4.9 exhibits that the fixed cost is increasing trend over the
study period and variable cost is also increasing trend except final year.

66
4.3 Cost Volume Profit Analysis
Cost-Volume-Profit (CVP) Analysis is a tool for planning and decision-making that
emphasizes the interrelationships of cost, quantity sold, and price (Hansen, et al.,
2007). It studies the effects of changes in cost and volume on a company's profits. It
can be used for analyzing management decisions such as setting selling prices,
determining product-mix, and maximizing the use of production facilities.

4.3.1 Cost Volume Ratio Analysis

Only the VC varies proportionately with the level of output or income. The
cost volume formula is used to derive the total cost that will be incurred at certain
production volumes. The formula is useful for deriving total costs for budgeting
purposes, or to identify the approximate profit or loss levels likely to be achieved at
certain sales volumes.

Table 4. 9: Cost Volume Ratio

Rs in Lakhs
Year Income Variable cost VC Ratio % Of change
(%)
2073/074 58324.45 31002.14 53.15 0
2074/075 84332.62 54042.94 64.08 10.93
2075/076 112995.1 72693.34 64.33 0.25
2076/077 126526.7 82675.8 65.34 1.01
2077/078 127528.6 75972.51 59.57 (5.77)

(Source: Table 4.8)

Figure 4. 10:Cost Volume Ratio

67
 Cost volume ratio
70

60

50

40

30

20

10

0
2073/074 2074/075 2075/076 2076/077 2077/078

Cost volume ratio

The above table 4.9 and figure 4.10 show that the cost volume ratio is in Fluctuating
trend. The highest VC ratio is 65.33% in fiscal year 2076/77and the lowest ratio is
53.15% in F/Y 2073/74.
4.3.2 Contribution Margin Analysis

CM is regarded as the excess of income price of a unit of output over its VC. It also
can be defined as the excess of income amount over VC.

Table 4. 10:Contribution Margin

Rs in Lakhs

Year Income Variable cost CM % Of

change
2073/074 58,324.45 31,002.14 27,322.31 -
2074/075 84,332.62 54,042.94 30,289.68 10.86
2075/076 112,995.13 72,693.34 40,301.79 33.05
2076/077 126,526.69 82,675.80 43,850.90 8.81
2077/078 127,528.59 75,972.51 51,556.08 17.57

(Source: Table 4.8)

68
 Figure 4. 11 : Contribution Margin

Contribution Margin
60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

-
28 1/74 2074/075 2075/076 2076/077 2077/078

Contribution Margin

The above table 4.10 and figure 4.11 exhibit that the contribution margin is in
increasing. The highest CM is 51,556.08 lakh in F/Y 2077/78 and the lowest CM is
27322.31 lakh in F/Y 2073/74.
4.3.3 Contribution Margin Ratio Analysis

C/M Ratio is also known as PV Ratio. The full form is Profit Volume Ratio. It is
important tool in studying profitability index. It can be obtained as follows.
Table 4. 11: Contribution margin ratio analysis

Year Income CM CM ratio % Of

(%) change
2073/074 27,322.31 46.85 -
58,324.45
2074/075 30,289.68 35.92 (10.93)
84,332.62
2075/076 112,995.1 40,301.79 35.67 (0.25)
3
2076/077 126,526.6 43,850.90 34.66 (1.01)
9
2077/078 127,528.5 51,556.08 40.43 5.77
9
(Source: Table 4.8)

Figure 4. 12:Contribution Margin Ratio Analysis

69
 CM Ratio
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-
2073/074 2074/075 2075/076 2076/077 2077/078

CM Ratio

The above table 4.11 and figure 4.12 ensure that CM ratio or PV ratio is in decreasing
trend initially and again started increasing trend in final year. The highest P/V ratio is
46.85% in F/Y 2073/74 and lowest is 34.66% in F/Y 2076/77.
4.4 Break-even Point (BEP)
BEP is the powerful tool to analyze the profit-making process. It is the specific way
of presenting & studying the interrelationship between the costs. It is the most
popular technique that indicates the level of income in which cost & revenue are in
equilibrium position.
i.e., BEP = No Profit No Loss. BEP can be computed as BEP (U) = TFC/ SPPU-
VCPU
BEP (Rs) = TFC/PV Ratio or TFC/1- VC/SR

Table 4. 12: BEP Income

(In Lakhs)
Year Total CM ratio PV ratio BEP %
fixed cost (%) (1-CM) Income Change
2073/07 8,532.46 46.85 0.53 16,052.1 -
4 4
2074/07 10,679.74 35.92 0.64 16,665.4 3.82
5 7
2075/07 15,127.26 35.67 0.64 23,513.9 41.09
6 3
2076/07 18,766.91 34.66 0.65 28,720.8 22.14
7 0

70
 2077/07 21,882.76 40.43 0.60 36,732.7 27.90
8 3
(Source: Table 4.8)
Figure 4. 13: BEP Income

BEP Income
40,000.00

35,000.00

30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

BEP Income

The above table 4.12 and figure 4.13 reveal that the BEP is in increasing trend
throughout the study period. The highest BEP is 36732.73 in F/Y 2077/78 and the
lowest BEP is 16,052.14 in F/Y 2073/74.

Table 4. 13: BEP ratio

(In Lakhs)

Year Income BEP Income BE Ratio %

Change
2073/074 58,324.45 16,052.14 27.52 -

2074/075 84,332.62 16,665.47 19.76 (7.76)

2075/076 112,995.13 23,513.93 20.81 1.05

2076/077 126,526.69 28,720.80 22.70 1.89

2077/078 127,528.59 36,732.73 28.80 6.10

(Source: Table 4.8)

71
 Figure 4. 14 : BEP Ratio

BEP ratio
35.00

30.00

25.00

20.00

15.00

10.00

5.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

BEP ratio

The above table 4.13 and figure 4.14 depict that the BE Ratio is in increasing trend
except the F/Y 2074/75. The highest BE ratio is 28.80% in F/Y 2077/78 and the
lowest BE ratio is 19.76% in F/Y 2074/75.
4.5 Margin of Safety (MOS)
Margin of safety is the excess of budgeted (or actual) income over the break-even
income volume. It is the difference between the budgeted or actual income revenue
and the break- even income revenue. MOS of MBL for the five fiscal year is as
follows.

MOS = Actual Income - B.E. Income

MOS
MOS ratio =
Income

Table 4. 14: Margin of safety

(In Lakhs)
Year Income BEP MOS MOS Ratio

72
 Income (%)

2073/07 58,324.45 16,052.14 42,272.30 72.48

4

2074/07 84,332.62 16,665.47 67,667.15 80.24

5

2075/07 112,995.13 23,513.93 89,481.19 79.19

6

2076/07 126,526.69 28,720.80 97,805.89 77.30

7

2077/07 127,528.59 36,732.73 90,795.86 71.20

8

(Source: Table 4.8)

Figure 4. 15 : Margin of safety

MOS
120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

MOS

The above table and figure deal that the margins of safety are in increasing trend
except final year. They are Rs42272.30, 67667.15, 89481.19, 97805.89, 90795.86
Lakhs for the year 2073/74, 2074/75, 2075/76, 2076/77 and F/Y 2077/78

73
respectively.
4.6 Profitability analysis of MBL
The “bottom line” in a company’s income statement is its net income or reported
profits. This figure is the basis for dividends and it is used to determine bonuses.
Financial statements report both on a firm’s position at a point in time and on its
operations over some past period. However, the real value of financial statements
lies in the fact that they can be used to help predict the firm’s future earnings and
dividends. Predicting the future is what financial statement analysis is all about.

An analysis of the firm’s ratios is generally the first step in a financial analysis. It
shows relationship between financial statement accounts. Generally, ratio analysis is
helpful in financial forecasting and planning effective control of the business,
communicates the strength and financial standing of the firm to the related parties
for comparison of a particular firm progress and performance for decision making.
There are various ratios helps to measure the profitability effectiveness of banks.
They are as follows.

4.6.1 Net Profit Margin Analysis (NPRM)

The profit margin ratio, also called the return on income ratio, is a profitability ratio
that measures the amount of net income earned with each dollar of income generated
by comparing the net income and net income of a company. In other words, the profit
margin ratio shows what percentage of income are left over after all expenses are
paid by the business. NPMR shows the ratio between net profit and income of bank.
Higher the NPMR indicate the highest overall efficiency of business.

Table 4. 15: Net Profit Margin Ratio

(In Lakhs)
Year Income Net Profit Ratio (%)

2073/074 58,324.45 12,568.90 21.55

2074/075 84,332.62 12,496.88 14.82

2075/076 112,995.13 16,970.88 15.02

74
 2076/077 126,526.69 12,651.51 10.00

2077/078 127,528.59 16,074.73 12.60

Mean 14.82

S.D 3.84

C.V. 26%

(Source: Appendix I)
Figure 4. 16: Net profit Margin Ratio

Net Profit Margin Ratio

25.00

20.00

15.00

10.00

5.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

Net Profit Margin Ratio

The table 4.15 and figure 4.16 disclose that the ratio of net profit margin ratio of
MBL are 21.55%, 14.82%, 15.02%, 10% and 12.60% in the year 2073/74, 2074/75,
2075/76, 2076/77 and F/Y 2077/78 respectively. This ratio is in fluctuating trend
over the study period. The average net profit margin of MBL is 14.80% and standard
deviation and the coefficient of variations are 3.84% and 26% percent
respectively.
4.6.2 Return on total assets

Return on total assets ratio shows the ratio between NP and TA of the bank. TA
includes fixed assets, cash balance, loan and bill purchase, etc. TA can be obtaining
from balance sheet of the company. Higher NP to TA ratio shows the better
performance of the bank.
Table 4. 16: Return on total assets ratio

75
 (In Lakhs)
Year Total Assets Net Profit Ratio
2073/074 691,275.50 12,568.90 1.82
2074/075 847,876.48 12,496.88 1.47
2075/076 1,052,460.46 16,970.88 1.61
2076/077 1,245,195.69 12,651.51 1.02
2077/078 1,582,135.48 16,074.73 1.02
Mean 1.39
S.D 0.32
C.V. 23%

(Source: Appendix I)
Figure 4. 17:Return on total assets ratio

Return on total assets

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
2073/074 2074/075 2075/076 2076/077 2077/078

Return on total assets

The above table 4.16 and figure 4.17 express that the ratio of ROA of MBL are
2.11%, 1.47%, 1 . 6 1 %, 1.02% and 1.02% in the year 2073/74, 2074/75,
2075/76, 2076/77 and F/Y 2077/78 respectively. Standard deviation and the
coefficient of variations are 0.32 and 23% percent respectively.

4.6.3 Return on Equity (ROE)

This ratio measure how prudently the management has employed shareholder’s fund
keeping the interest of shareholders and maximize their net worth. It is the
measurement of the rate of return available to the bank’s shareholders.

76
 Table 4. 17: Return on Equity ratio
(In Lakhs)
Year Total Equity Net Profit Ratio
2073/074 92,102.06 12,568.90 13.65
2074/075 103,568.72 12,496.88 12.07
2075/076 112,368.72 16,970.88 15.10
2076/077 115,847.03 12,651.51 10.92
2077/078 128,641.32 16,074.73 12.50
Mean 12.85
S.D 1.43
C.V. 11%

(Source: Appendix I)
Figure 4. 18: Return on Equity

Return on Equity
16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

Return on Equity

The above table 4.17 and figure 4.18 point out that the ratio of ROE of MBL are
13.65%, 12.07%, 15.10%, 10.92% and 12.50% in the year 2073/74, 2074/75,
2075/76, 2076/77 and F/Y 2077/78 respectively. The average return on equity of
MBL is 13% and standard deviation and the coefficient of variations are 1.43 and
11% percent respectively.
4.6.4 Operating Efficiency Ratio

This ratio shows the relation between operating income and operating expenses.

77
Lower ratio is showing the better performance of the company. Operating income
includes interest income and other operating income and operating expenses includes
interest expenses, personal expenses and administrative expenses.
Table 4. 18: Operating Efficiency Ratio
(In Lakhs)
Year Operating Operating Ratio
Income expense
2073/074 57,307.45 39,534.59 68.99
2074/075 82,805.26 64,722.68 78.16
2075/076 111,823.42 87,820.60 78.54
2076/077 120,647.45 101,442.71 84.08
2077/078 122,550.60 97,855.27 79.85
Mean 77.92
S.D 4.93
C.V. 6%

Figure 4. 19: Operating Efficiency Ratio

Operating Efficiency Ratio

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

Operating Efficiency Ratio

The above table 4.18 and figure 4.19 provide that the operating efficiency ratio of
MBL are 68.99%, 78.16%, 78.54%, 84.08% and 79.85% in the year 2073/74,
2074/75, 2075/76, 2076/77 and F/Y 2077/78 respectively. The average Operating
efficiency of MBL is 77.92% and standard deviation and the coefficient of variations
are 4.93 and 6% percent respectively.

78
4.7 Correlation Analysis
To find out the correlation between two continuous variables, Karl Pearson’s co-
efficient of correlation (r) is used. One of the very convenient and useful way of
interpreting the value of coefficient of correlation (r) between the two variables is
coefficient of determination, which is denoted by r². It explains the total variation in
dependent variable is explained by independent variable. The significance of
coefficient of correlation (r) is tested with the help of ‘t’ test. If calculated ‘t’ is less
than or equal to tabulated value of ‘t’ it falls in the accepted region and null
hypothesis is accepted or ‘r’ is not significant, if calculated ‘t’ is greater than
tabulated ‘t’ null hypothesis is rejected or ‘r’ is significant of correlation in the
population.
4.7.1 Correlation between Total cost and profit

Coefficient of correlation measures the degree of relationship between two variables,

Total Cost (TC) & Profit (P). TC is independent variable (X1) and P is dependent
variable (X2). The purpose of computing is to find out the relationship between TC
and P is going to same direction or opposite direction.
Table 4. 19: Relationship between Total cost and profit

Factor Value
Correlation (r) 0.519
Coefficient of Determination (r2) 0.2693
Calculated t – value 1.051
Tabulated t – value 2.201
Remarks Significant
(Source: Appendix II)
The above table 4.19 explains the relationship between total cost and net profit during
the period of study. The MBL coefficient of correlation (r) between total cost
and net profit is 0.519. This figure shows the positive association between total
cost and net profit. It means total cost and net profit both move towards same
direction. The coefficient of determination (r2) is 0.2693. It shows that 26.93% of
the variation in the dependent variable (i.e., net profit) is explained by the
independent variable (i.e., total cost). The calculated value of ‘t’ is less than the
tabulated value of ‘t’ (i.e., 1.051 < 2.201) therefore true value of ‘r’ is in
significant. It reveals that there is significant relationship between the total cost and

79
net profit.
4.7.2 Correlation between Income and Profit

Coefficient of correlation measures the degree of relationship between two variables,

Income& Profit. income’s independent variable (x) and Profit is dependent
variable (y). The purpose of computing is to find out the relationship between Income
and Profit is going to same direction or opposite direction.
Table 4. 20: Relationship between Income and Profit

Factor Value
Correlation 0.5738
Coefficient of Determination 0.3292
Calculated t – value 1.21
Tabulated t – value 2.201
Remarks significant
(Source: Appendix III)
The above table 4.20 presents that the coefficient of correlation (r) between operating
income and net profit 0.5738. This figure shows the positive association between
income and net profit. It means total cost and net profit both move towards same
direction. The coefficient of determination (r2) is 0.3292. It shows that 32.92% of the
variation in the dependent variable (i.e., net profit) is explained by the independent
variable (i.e., income). The calculated value of ‘t’ is less than the tabulated value
of ‘t’ (i.e., 1.21< 2.201) therefore true value of ‘r’ is significant. It reveals that
there is significant relationship between the income and net profit.
4.8 Trend Analysis
Under this topic, trend analysis of Income and Net Profit of MBL is studied during
the period. The objective of this topic is to forecast the Income and Net Profit for the
next five years. The projections are based on thes e assumptions; The bank will run
in the present style, Nepal Rastra Bank and the Government of Nepal will not make
any amendments in the guidelines for the operation of commercial banks and other all
the things also remain constant.

4.8.1 Trend Analysis of Income

Under this topic, an effort has been made to calculate the trend value of income of
MBL under five years study period and project the trend for next five years. The

80
following table describes the trend values of income of MBL for five years.

Table 4. 21: Trend Value of Income

a b 2073/74 2074/75 2075/76 2076/77 2077/78

99,026.83 16,832.85 149525.38 166358.23 183191.08 200023.93 216856.785

(Source: Appendix VI)

Figure 4. 20: Trend Line of Income

Trend Line of Income

250,000.00

200,000.00

150,000.00

100,000.00

50,000.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

Trend Line of Income

The above table 4.21 and figure 4.20 reveal that the trend of income which shows
that the bank has consistent income throughout the study period. Since, the
calculated value of ‘b’ is positive, it means that income is increasing with time. If
other things remaining the same, MBL in the year 2077/78, income is Rs.
216856.785 Lakh and it will increase by Rs. 16,832.85 lakh in every year.

4.8.2 Trend analysis of Net profit

Net profit is the major objectives of any business. It attracts to invest more in the

81
industry. I encourage entrepreneur to introduce new technology, new product. It also
shows the competence of management to operate in the given business environment.
It also shows the health of the firm or company. Trend analysis is conducted to
predict future net profit.

Under this topic, an effort has been made to calculate the trend value of net profit of
MBL under five years study period and project the trend for next five years. The
following table describes the trend values of net profit of MBL for five years.
Table 4. 22: Trend value of Net profit

a b 2073/74 2074/75 2075/76 2076/77 2077/78

14152.42 716.62 16302.28 17018.9 17735.52 18452.14 19168.76

(Source: Appendix V)

Figure 4. 21: Trend Line of Net Profit

Trend line of net profit

19500
19000
18500
18000
17500
17000
16500
16000
15500
15000
14500
2073/074 2074/075 2075/076 2076/077 2077/078

Trend line of net profit

The above table 4.22 and figure 4.21 indicates that the trend of Net profit which
shows that the bank has consistent net profit throughout the study period. Since, the
calculated value of ‘b’ is positive, it means that the bank net profit is increasing
with time. If other things remaining the same, the trend of MBL in the year
2077/78 net profit is Rs. 19168.76 lakh and it will increase by Rs. 716.62 lakh
every year.

82
4.8.3 Trend analysis of Total cost
There are three types of costs from their nature of variability. They are: variable
costs, fixed cost and semi variable cost. Under this topic, an effort has been made to
calculate the trend value of total cost of MBL under five years study period and
project the trend for next five years. The following table describes the trend values
of total cost of MBL for five years.
Table 4. 23: Trend line of total cost

a b 2073/74 2074/75 2075/76 2076/77 2077/78

84,470.20 15,640.85 131,392.76 147,033.62 162,674.47178,315.32 193,956.18

(Source: Appendix VI)

Figure 4. 22: Trend line of Total cost

Trend line of total cost

250,000.00

200,000.00

150,000.00

100,000.00

50,000.00

-
2073/074 2074/075 2075/076 2076/077 2077/078

Trend line of total cost

The above table 4.23 and figure 4.22 explain that the trend of total cost which
shows that the bank has consistent total cost throughout the study period. Since, the
calculated value of ‘b’ is positive, it means that total cost is increasing with time. If
other things remaining the same, MBL in the year 2077/78, total cost is
Rs.193,956.18 lakh and it will increase by Rs.15,640.85 lakh in every year.
4.9 Major findings of study
 The total income from interest Rs. 51530.24 in F/Y 2073/74, Rs. 77663.56 in
F/Y 2074/75, Rs. 101775.23 in F/Y 2075/76, Rs.113528.89 in F/Y 2076/77
and Rs.111554.83 lakhs in F/Y 2077/78. It means the income from interest

83
 earn is in increasing trend.
 The total income from commission and discount are Rs. 4,508, Rs.4911,
Rs.7905, Rs.9475 and Rs.11429 million in F/Y 2073/74, F/Y 2074/75, F/Y
2075/76, F/Y 2076/77 and F/Y 2077/78 respectively. It has fluctuating trend
during the five years study period.

 The total income from operating income is Rs. 972.71 lakh in F/Y 2073/74
then it slowly decreases to Rs. 90.34 Lakh in F/Y 2074/75. Similarly, it is
Rs.281.39 Lakh in F/Y 2075/76. After that it also increases to 701.29 Lakh
in, 2076/77 and in final year i.e., F/Y2077/78, it increases to 193.87. It
indicates that it is increasing trend.
 The total interest expenses are in fluctuating trend. In the F/Y 2073/74, it is
Rs. 27910.35, in F/Y 2074/75, it increases to Rs. 50265.57. After that it
Increases to Rs.66277.67 in the F/Y 2075/76 and in F/Y 2076/77 it is Rs.
74909.9. Then it slowly decreases in F/Y 2077/78 i.e., Rs. 68039.9 Lakhs.
Interest expenses play vital role in profit hence it need proper planning to
manage profit each year.

 The total personnel expenses are 6,938.04, 8,746.40, 12,303.81, 15,029.10 and
17,695.08 million in in F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77
and F/Y 2077/78 respectively. It shows how much amount spending on
employee salary, allowance, PF, training, etc.

 Operating expenses is in increasing trend. The expenses are Rs. 4725, 4195,
7236, 8884 and 8908 Lakhs for the F/Y 2073/74, F/Y 2074/75, F/Y 2075/76,
F/Y 2076/77 and F/Y 2077/78 respectively.
 The income statement shows that the all variables of income statement like
operating income, variable cost, fixed cost, operating profit, net profit are in
increasing trend. The net profit of the bank are Rs. 12568.90, 12496.88,
16970.88, 12651.51 and 16074.73 million for the F/Y 2073/74, F/Y 2074/75,
F/Y 2075/76, F/Y 2076/77 and F/Y 2077/78 respectively. Similarly, the
operating profit of the bank are also increasing trend they are Rs. 17,772.85,
Rs.18,082.58, Rs. 24,002.82, Rs.19,204.74 and Rs.24,695.33 million for the
year F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77 and F/Y 2077/78
respectively.
 The Income, VC and CM of five years study period of MBL. CM and VC

84
 variables are in increasing trend throughout the study period. It shows that the
CM of the F/Y 2073/74, F/Y 2074/75, F/Y 2075/76, F/Y 2076/77 and F/Y
2077/78 are Rs. 27,322.31, 30,289.68, 40,301.79, 43,850.90 and 51,556.08
lakh respectively.
 CM ratio or PV ratio is in fluctuating trend throughout study period of five
year. The highest PV ratio is 46.85% in fiscal year 2073/74 and lowest is
34.66 in fiscal year 2076/77.
 MBL’s income revenue is higher than BEP income in every year over the
study period. So, it indicates that CVP position of MBL is very good. It
means MBL is earning profit in each fiscal year over the study period.
 The margins of safety are in increasing trend except final year. They are
Rs42272.30, 67667.15, 89481.19, 97805.89, 90795.86 Lakhs for the year
2073/74, 2074/75, 2075/76, 2076/77 and F/Y 2077/78 respectively.
 The BE Ratio is in increasing trend except the F/Y 2074/75. The highest BE
ratio is 28.80% in F/Y 2077/78 and the lowest BE ratio is 19.76% in F/Y
2074/75. Similarly, the margins of safety ratios are in fluctuating trend. The
highest ratio is 80.24% in the F/Y 2074/75 and lowest ratio is 72.48% in F/Y
2073/74. However, the trend of MOS ratio is highest than BE ratio over the
study period.

 The ratio of net profit margin ratio of MBL are 21.55%, 14.82%, 15.02%,
10% and 12.60% in the year 2073/74, 2074/75, 2075/76, 2076/77 and F/Y
2077/78 respectively. This ratio is in fluctuating trend over the study period.
The average net profit margin of MBL is 14.80% and standard deviation and
the coefficient of variations are 3.84% and 26% percent respectively.

 The ratio of ROA of MBL are 2.11%, 1.47%, 1 . 6 1 %, 1.02% and 1.02%
in the year 2073/74, 2074/75, 2075/76, 2076/77 and F/Y 2077/78
respectively. Standard deviation and the coefficient of variations are 0.32 and
23% percent respectively.

 The ratio of ROE of MBL are 13.65%, 12.07%, 15.10%, 10.92% and 12.50%
in the year 2073/74, 2074/75, 2075/76, 2076/77 and F/Y 2077/78 respectively.
The average return on equity of MBL is 13% and standard deviation and the
coefficient of variations are 1.43 and 11% percent respectively.

85
 The operating efficiency ratio of MBL are 68.99%, 78.16%, 78.54%,
84.08% and 79.85% in the year 2073/74, 2074/75, 2075/76, 2076/77 and
F/Y 2077/78 respectively. The average Operating efficiency of MBL is
77.92% and standard deviation and the coefficient of variations are 4.93 and
6% percent respectively.
 The MBL coefficient of correlation (r) between total cost and net profit
is 0.519. This figure shows the positive association between total cost
and net profit. It means total cost and net profit both move towards same
direction. The coefficient of determination (r2) is 0.2693. It shows that
26.93% of the variation in the dependent variable (i.e., net profit) is
explained by the independent variable (i.e., total cost). The calculated value of
‘t’ is less than the tabulated value of ‘t’ (i.e., 1.051 < 2.201) therefore true
value of ‘r’ is in significant. It reveals that there is significant relationship
between the total cost and net profit.
 The coefficient of correlation (r) between operating income and net profit
0.5738. This figure shows the positive association between income and net
profit. It means total cost and net profit both move towards same direction.
The coefficient of determination (r2) is 0.3292. It shows that 32.92% of the
variation in the dependent variable (i.e., net profit) is explained by the
independent variable (i.e., income). The calculated value of ‘t’ is less than
the tabulated value of ‘t’ (i.e., 1.21< 2.201) therefore true value of ‘r’ is
significant. It reveals that there is significant relationship between the
income and net profit.

 The trend of income which shows that the bank has consistent income
throughout the study period. Since, the calculated value of ‘b’ is positive, it
means that income is increasing with time. If other things remaining the
same, MBL in the year 2077/78, income is Rs. 216856.785 Lakh and it will
increase by Rs. 16,832.85 lakh in every year.

 The trend of Net profit which shows that the bank has consistent net profit
throughout the study period. Since, the calculated value of ‘b’ is positive, it
means that the bank net profit is increasing with time. If other things
remaining the same, the trend of MBL in the year 2077/78 net profit is Rs.
19168.76 lakh and it will increase by Rs. 716.62 lakh every year.

86
The trend of total cost which shows that the bank has consistent total cost
throughout the study period. Since, the calculated value of ‘b’ is positive, it means
that total cost is increasing with time. If other things remaining the same, MBL
in the year 2077/78, total cost is Rs.193,956.18 lakh and it will increase by
Rs.15,640.85 lakh in year.

CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

This is the final chapter of this thesis, which has been divided into summary,
conclusions and recommendations. In this chapter, we examine the processed data to
come into new concluding upon the profit planning of MBL. It also aims to give
forth some suggestion that must be helpful for further enhancement of the operation
of MBL.
5.1 Summary
The economic development of a country depends upon the development of commerce
and industry. And, there is no any doubt; banking promotes the development of
commerce because banking itself is the part of commerce. The process of economic
development depends upon various factors; however, economists are now convinced
that capital formation and its proper utilization plays a paramount role for rapid
economic development.
Every business organization set up with certain objective of providing services to
people and earns profit as income whether that is productive or non- productive. But
it is not a joke to fulfill that objective easily in this competitive world of
business. As globalization take place it became tougher to sustain in market. So, they
not only just try and see the result also do hard work and provide many
facilities to secure from loss. Hence, they need to think about future course of
action in such a way so that they can accomplish their business objectives. In order to
make profit it is necessary to check business capacity, activities, utilization of
resources and if there is any part to reduce cast because little reduction in expenses a
make profit in income. Hence, profit planning tools helps to assist in analyzing the

87
situation. Therefore, proper planning & controlling is important to survive &lead the
company successfully. Organization cannot achieve its goal without proper
planning and implementation. People invest huge amount of money in the business to
earn profit.
PPC means the development of objectives, which motivates the organization to
achieve the objectives effectively and efficiently. It is one of the most important
mechanisms for planning and controlling business operations. The effective
operation of a business concern resulting into the excess of income over the
expenditure fully depends upon as to what extent the management follows proper
planning, effective coordination and dynamic control. There are 27 commercial
banks have been operating in Nepal are considered to be the population of the study
and out of them MBL has been taken as a sample of the study and the collected data
have been analyzed by using various financial tools and statistical tools like ratio
analysis, correlation coefficient, regression equation etc.

The main objective of the present research is to examine the profit planning and
control of MBL. So, this study is undertaken to evaluate PPC analysis of the
commercial bank. As per the nature of the study, the secondary data have been used.
This study covers 5 fiscal years data from FY 2073/74 to 2077/78. This study is
divided into five chapters, which consists (1) Introduction (2) Conceptual framework
and Review of literature, (3) Research and Methodology (4) Presentation and
Analysis of Data and (5) Summary, Conclusion and Recommendations.
5.2 Conclusion
Management can effectively achieve organizational objectives through the efficient
use of scarce available resources in a changing environment of business. Future is
uncertain which creates risk and only the good management can reduce it. Profit
planning and control is management technique and it is a written plan in all aspect of
business operation for definite future period. Profit planning is usefulness and
effectiveness for every commercial bank. In fact, profit planning has become
associated with profit.

From the above analysis it is found that the profitability ratios, are strong profitable of
MBL. It also found that high contribution margin and low fixed cost of MBL. Staff
expenses has played the key role to increase the administrative fixed cost. In addition,
MBL has been successful in mobilizing their total assets on loans and advances for

88
the purpose of income generation. The bank is successful to mobilize its total
assets on purchase of shares &debentures of other companies to generate incomes.
All the level of management is not involved in profit planning & decision making.
MOS is higher than BEP income. It means well performance of MBL. Income from
interest is in increasing trend. Sundry income is also increasing each year. Interest
expenses are also increasing each year.Net profit increases every year i.e., it is profit
making bank.
5.3 Recommendations
Recommendations are the final output of the whole study. It helps to convey positive
information and proper way of improvement to concern bank MBL as well as other
interest researcher in upcoming days. Various analyses have been done until this
stage. On the basis of analysis and finding of the study, following suggestion and
recommendation can be advanced to overcome weakness, inefficiency and
satisfactory improvement policy of MBL.
 Cost should be segregated into fixed and variable.
 BEP analysis should be done while planning.
 MBL should consider the cost – volume – profit relationship while fixing the
price of its products.
 The bank should develop the budgeting practice, which is one of the tools of
profit planning. To improve the financial condition of the industry, it should
develop annual (tactical) and long-term profit plan.
 MBL should increases interest rate providing in deposits to lure people.
 Trend analysis show the operating income is increasing trend. It is better to
make efficient and professional in cost bearing, monitoring and proper risk
management and net profit amount of MBL will increase in future so bank
has to train its employee.
 Further studies can be conducted by increasing sample size, no. of
observations econometric and other various tools and techniques.

89
 BIBLOGRAPHY
Books
Agrawal, G. R. (2000). Project Management in Nepal. Kathmandu: M.K. Publishers
and Distributors Pvt. Ltd.
Besley, J. B. (1964). Banking Management. New Delhi: Sujeet Publication.
Budha, B. B. (2015). Monetary Policy Transmission in Nepal. Monetary Policy
Transmission in Nepal.
Dangol, R. M. (1999). Accounting for Business. KAthmandu: Taleju Pustak Bitarak.
David , S. R. (1987). Statistical of Management. New Delhi: Prentice Hall Inc. N.J.
Decoster, D. T., & Schafer, E. F. (1985). Management Accounting. New York.
Drucker, P. F. (1989). The Practice of Management. New York: Harperand Raw
Publisher.
Drucker, P. F. (1989). The Practice of Management. New York: Harperand Raw
Publisher.
Fago, G., & Niraula, H. (n.d.). Profit planning & Control. Kathmandu: Buddha
Publication.
Frank, K. R. (1999). Investment Management. Tokyo: The Drydenpress, CBS
Publishing Ltd.
Fremgen, J. M. (1976). Accounting for Managerial Analysis. New York: Illnos
Publication.
Gitman, L. J. (1990). Fundamental of Investing. New Delhi: Harper and Row
Publishing Publishers.

90
Gupta, S. P. (1992). Management Accounting. Kathmandu: Agra Sahitya Bhandar.
Horngreen, C. T. (1992). Cost Accounting and Management Emphasis. New Delhi:
Prentice Hall of India Pvt. Ltd.
Jethara, R. (2021, 05 10). Banking History Of Nepal. Banking History Of Nepal.
Khan , M. Y., & Jain, P. K. (1993). Management Accounting. New Delhi: Tata MC
Grew Hill Publishing Co.
Kothari, C. R. (1984). Quantitative Techniques. New Delhi: Vikash Publishing
House.
Kothari, C. R. (1997). Research Methodology: Methods and Techniques. Wishwa
Prakashan.
Lynch, R. M. (1989). Accounting for Management. New Delhi: Tata MC Grew Hill
Publishing Co.
Welsch, G. A., & Hilton, R. W. (1998). Comprehensive profit Planning and Control.
Prentice Hall.
Journal and Article
Karki, M. (2011). Profit Planning of BOK Bank . PUC Journal of Management.
Khadka, K. (2007). A Profit Planning Commercial Banks, BOK and NIBL. Nepal
Bank Patrika, p.13.
Robbins, S., & Edward, F. (2015). Profit Planning and Finance Function. The Journal
of Finance.
Harris, P. (2015). Profit Planning for Hospitality and Tourism. Scandinavian Journal
of Hospitality and Tourism, Vol. 21(3).
Shrestha , R. (2008). Current Profit Planning Premises adopted and its effectiveness in
Commercial Bank. Rastra Bank Samachar.
Shakya, A. S. (2012). A comparative study on Profit Planning in the context of
particularly commercial banks. Nepal Bank Patrika, NBL, Vol. 25.
Adesina, O. (2016). Accounting Information and Profit Planning. European Journal
of Accounting and Finance Research, Vol.(3), 4-86.
Thesis

Acharya, R. K. (2014). Analysis of Profit Planning Procedure of commercial Ban

(With Reference to Nepal SBI Bank Ltd.). An Unpublished Master's Degree
Thesis, Summitted to Office of the Dean, FOM, T.U.

91
Bhattrai, B. P. (2013). The sales budget of Manufacturing Public Enterprises. An
Unpublished Master's Degree Thesis, Summitted to Office of the Dean, FOM,
T.U.

Maharjan, L. (2011). Profit Planning in a Commercial Bank (With Reference to

Standard Chartered Bank Nepal Ltd.)”. An Unpublished Master's Degree
Thesis, Summitted to Office of the Dean, FOM, T.U.

Pandey, I. M. (2012). A Comparative study on Profit Planning of Commercial Banks

(With Reference to BOK and NBL). An Unpublished Master's Degree Thesis,
Summitted to Office of the Dean, FOM, T.U.

Pandey, R. (2015). Profit Planning of Nabil Bank Limited. An Unpublished Master's

Degree Thesis, Summitted to Office of the Dean, FOM, T.U.

Websites

https://www.machbank.com/

https://www.nrb.org.np/

https://www.wikipedia.org/

92
 APPENDIX
Appendix-I

Calculation of Mean, Standard Deviation and Coefficient of Variation of MBL

In %

Net profit Operating

ROA ROE
Margin Ratio Efficiency Ratio
Fiscal Year
(X -
X (X - X̅ )2 X (X - X̅ )2 X (X - X̅ )2 X
X̅ )2
2073/074 21.55 45.58 1.82 0.19 13.65 0.64 68.99 79.86
2074/075 14.82 0.00 1.47 0.01 12.07 0.61 78.16 0.06
2075/076 15.02 0.05 1.61 0.05 15.10 5.09 78.54 0.37
2076/077 10.00 23.03 1.02 0.14 10.92 3.71 84.08 37.93
2077/078 12.60 4.81 1.02 0.14 12.50 0.12 79.85 3.71
Total 73.99 73.48 6.94 0.52 64.23 10.17 389.62 21.93
1. 12. 77.
Mean
14.80 39 85 92
S.D. 3. 0. 1. 4.

93
 84 32 43 93
C.V. 26% 23% 11% 6%

Appendix-II

Calculation of Mean value and correlation between Total Cost and Net Profit of MBL

x2 = X2-
Year TC (X1) NP (X2) x1 = X1- X̅ x1. x2 (X1)2 (X2)2
X̅

(39,552.34 (1,583.68 62,638,157.

2073/07 12,568.9 1564387269 2508035.476
44,917.87 ) ) 44
4 0

(14,145.10 (1,655.70 23,420,022.

2074/07 12,496.8 200083916.5 2741337.099
70,325.10 ) ) 70
5 8

10,652.4 2,818.3 30,021,793.

2075/07 16,970.8 113474568.3 7942819.952
95,122.65 4 0 17
6 8

107,401. 22,931.2 (1,501.07 (34,421,493.6

2076/07 12,651.5 525841305.2 2253225.861
43 3 ) 9)
7 1

104,583.9 20,113.7 1,922.1 38,661,675.

2077/07 16,074.7 404563497.4 3694661.422
7 6 5 43
8 3

∑X1 ∑X2 = ∑ x1.x2 = ∑x12 = ∑x22 =

Sum (∑)
=422351.01 70762.91 120320155.05 2808350556.24 19140079.81

∑ X 1 422351.01
Mean for TC ( X̅ 1)= = = 84,470.20
n 5

∑ X 2 70762.91
Mean for NP ( X̅ 2)= = = 14,152.58
n 5

∑ x 1. x 2 120320155.05
Coefficient of Correlation: = =
√∑ X 2
1 X 2
2 √2808350556.24 ×19140079.81
94
 r= 0.519

Correlation(r)= 51.9 %

Coefficient of Determination (r2) = r2 = 0.5192 = 0.2693 = 26.93%

Hypothesis test

r
√1−r 2 √
t= × n−2

0.519
√1−0.5192 √
t= × 5−2

0.519
t= × 1.732
0.8547

t= 0.607×1.732

t=1.051

Appendix III

Calculation of mean value and correlation between operating income and Net profit of
MBL

Operating
Year NP (X2) x1 = X1- X̅ x2 = X2- X̅ X1. X2 ∑x12 ∑x22
Profit (X1)

(41,719.39) (1,583.68) 1740507481 2508035.476

2073/074 57,307.45 12,568.90 66,070,072.71

(16,221.57) (1,655.70) 263139468.8 2741337.099

2074/075 82,805.26 12,496.88 26,858,033.96

12,796.58 2,818.30 163752512.5 7942819.952

2075/076 111,823.42 16,970.88 36,064,618.72
2076/077 21,620.62 (1,501.07) 467451083.4 2253225.861

95
 120,647.45 12,651.51 (32,454,165.68)

23,523.76 1,922.15 553367509 3694661.422

2077/078 122,550.60 16,074.73 45,216,209.35
∑X1 ∑X2 = ∑ x1.x2 = ∑x12 = ∑x22 =
Sum (∑)
=495134.17 70762.91 141754769.05 3188218054.7 19140079.80

∑ X 1 495134.17
Mean for OP ( X̅ 1)= = = 99,026.83
n 5

∑ X 2 70762.91
Mean for NP ( X̅ 2)= = = 14,152.58
n 5

∑ x 1. x 2 141754769.05
Coefficient of Correlation: =
√∑ X 2
1 X
2
2 √3188218054.7 × 19140079.81

r= 0.5738

Correlation(r)= 57.38%

Coefficient of Determination (r2) = r2 = 0.57382 = 0.3292 = 32.92%

Hypothesis test

r
√1−r 2 √
t= × n−2

0.5738
√1−0.57382 √
t= × 5−2

0.5738
t= × 1.732
0.819

t= 0.7×1.732

t=1.21

Appendix IV

Least Square of Linear Trend of Total operating Income

Fiscal MBL
Year (t) Operating

96
 income X2
X = t-2075/76 XY
(Y)
2073/074 57,307.45 -2 4 (114,614.89)
2074/075 82,805.26 -1 1 (82,805.26)
111,823.4 0 0
-
2075/076 2
120,647.4 1 1
120,647.45
2076/077 5
2077/078 122,550.60 2 4 245,101.20
∑y = 0 10 ∑XY =
Sum (∑)
495,134.17 168,328.50

For MBL

∑y 495134.17 ∑ xy 168328.50
Since ∑X = 0, a = = = 99,026.83 and b = 2 = =
n 5 ∑X 10
16,832.85

Substituting these values in the following formula, y = a + bx

Year MBL
2073/074 99026.83 + (16832.85× 3) = Rs. 149525.38
2074/075 99026.83 + (16832.85× 4) = Rs. 166358.23
2075/076 99026.83 + (16832.85× 5) = Rs 183191.08
2076/077 99026.83 + (16832.85× 6) = Rs. 200023.93
2077/078 99026.83 + (16832.85× 7) = Rs. 216856.785
Appendix IV

Least Square of Linear Trend of Net Profit

Fiscal Year MBL

(t) Net profit
(Y) X2
X = t-2075/76 XY

2073/074 12,568.90 -2 4 (25,137.81)

2074/075 12,496.88 -1 1 (12,496.88)

97
2075/076 16,970.88 0 0 -
2076/077 12,651.51 1 1 12,651.51
2077/078 16,074.73 2 4 32,149.46
∑y = 0 10 ∑XY =
Sum (∑)
70,762.91 7,166.28

For MBL

∑y 70762.91 ∑ xy 7166.28
Since ∑X = 0, a = = = 14152.42 and b = 2 = = 716.62
n 5 ∑X 10

Substituting these values in the following formula, y = a + bx

Year MBL
2073/074 14152.42 + (716.62× 3) = Rs. 16302.28
2074/075 14152.42 + (716.62× 4) = Rs. 17018.9
2075/076 14152.42 + (716.62× 5) = Rs 17735.52
2076/077 14152.42 + (716.62× 6) = Rs. 18452.14
2077/078 14152.42 + (716.62× 7) = Rs. 19168.76

Appendix VI

Least Square of Linear Trend of Total Cost

Fiscal MBL
Year (t) Total Cost
(Y) X2
X = t-2075/76 XY

2073/074 44,917.87 -2 4 (89,835.74)

2074/075 70,325.10 -1 1 (70,325.10)
2075/076 95,122.65 0 0 -
2076/077 107,401.43 1 1 107,401.43
2077/078 104,583.97 2 4 209,167.94
∑y = 0 10 ∑XY =
Sum (∑)
422,351.02 156,408.53

98
For MBL

∑y 422,351.02 ∑ xy 156,408.53
Since ∑X = 0, a = = = 84,470.20 and b = 2 = =
n 5 ∑X 10
15,640.85

Substituting these values in the following formula, y = a + bx

Year MBL
2073/074 84470.20 + (15640.85× 3) = Rs. 131392.763
2074/075 84470.20 + (15640.85× 4) = Rs. 147033.616
2075/076 84470.20 + (15640.85× 5) = Rs 162674.469
2076/077 84470.20 + (15640.85× 6) = Rs. 178315.322
2077/078 84470.20 + (15640.85× 7) = Rs. 193956.175

99