CHAPTER - I

INTRODUCTION

1.1 Background of the Study

The sales budget contains an itemization of a company's sales expectations for

the budget period, in both units and dollars. If a company has a large number
of products, it usually aggregates its expected sales into a smaller number of
product categories or geographic regions; otherwise, it becomes too difficult to
generate sales estimates for this budget. The sales budget is usually presented
in either a monthly or quarterly format; presenting only annual sales
information is too aggregated, and so provides little actionable information.
The information in the sales budget comes from a variety of sources. Most of
the detail for existing products comes from those personnel who deal with
them on a day-to-day basis. The marketing manager contributes sales
promotion information, which can alter the timing and amount of sales. The
engineering and marketing managers may also contribute information about
the introduction date of new products, as well as the retirement dates of old
products.

Economic development is considered as the basic requirement of every country to

fulfill the aspiration of the people. Hence, there should be smooth development of
the industries and the financial institutions, so that the country can acquire its
required fund and capital forms its own resources. Financial institutions like
banks, finance companies, co-operative companies, Insurance Companies etc. play
significant role in the country’s economy. Insurance companies play vital role in
the economy among financial institutions. Since there is perfect competition in all
the businesses in the world, the existence of organized financial market and capital
market within the boundary of the nation is regarded as an essence for the
economic development of a country. Each financial institution plays a key role in

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the financial and capital market through investing the collect resources within the
recognized productive sectors and industries. Integrated and speedy economic
development of the country is possi9ble if competitive insurance services are
available in every corner of the country. Since the insurance companies cover the
risk factor and provide capital to the industries, businesses and trade; it plays
definite and important role in the framework of the country’s economy. According
to nature, characteristics and objectives of the insurance companies, they are
treated as the category of financial intermediaries. Hence, they are capable to
provide industrial finance, Government finance and so on. In the context of
Nepalese insurance companies, they are providing various insurance services and
charges premium under the insured risk.

Due to the high rate of competition and risks involving in all the business at
present, insurance business is also becoming more complex. The only reliable
option is good management for the smooth running of insurance sectors that help
the organization to be protected from the unexpected happenings which may occur
in the future. Systematic and well budget is the secret for the success of every
business organization in term of earning profit by providing goods and services to
the customers. Better planning is gives right decision; as a result it maximizes the
profit.

1.1.1 Profile of the Organization

Introduction of Everest Insurance Company Ltd.

Everest Insurance Company Ltd is a leading insurance company of Nepal. Everest
insurance company has always been ensuring on world-class quality services. It’s
policies are varied in nature and it have a wide range of non life insurance
schemes, which will ensure that the life of comfort, free from worries.

With an ambition of safe keeping Nepal, Everest Insurance Company was

established in 1994 A.D. as a Public Limited Company. Everest Insurance

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Company has come a long way in winning trust from its more than 20,000 clients
and is at present one of the leading insurance company in Nepal. The strength o0f
the company lies in it’s management committee background, dynamic staff of 74
members and country wise network of 300 agents.

Everest insurance company started its operation in July 1994 after the insurance
sectors was private. The company strength lies behind the fact that, promoted by
leading business and industrial house in Nepal. At the helm of its affairs stands a
dedicated and experienced board of directors. A management committee under the
chairmanship of Rajendra Khetan has been formed to ensure the smooth
functioning of the company. The Everest Insurance Company primary focuses is
to bring about awareness as to why insurance in crucial in modern life and we seek
to do this with through professionalism. We have an insight into life and it’s
possible pitfalls, which has help to understand the common man requirements and
deliver quality service accordingly.

1.2 Statement of Problem

The main purpose of this study is to examine "Cost-volume profit analysis as a

tool to measure the effectiveness of Everest Insurance Company.". To achieve this,
the following, objectives have been carried out:

i. To analyze the application of CVP analysis in Everest Insurance Company

Ltd.
ii. To analyze and evaluate the profitability and financial performance of
Everest Insurance Company Limited
iii. To examine and assess the risk of the company with the help of operating
leverage technique.

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1.3 Objectives of the Study

Every study has its own objectives. This study is also concentrated in the certain
issues of the insurance sector especially in EIC. The main objective of this study is
to find out the application of the sales budgets and other aspects of the PPC. The
general objective of the study is to examine, evaluate and interpret the present
comprehensive profit planning system applied by EIC.

The major specific objectives are highlighted below:-

i. To analyze the effectiveness of profit planning in EIC.

ii. To evaluate variances in budgets and actual results.
iii. To suggest appropriate recommendation

1.4 Rationale of the Study

Today the need of profit planning process/ budgeting is very necessary and has a
great role to play in profitability as well as overall managerial performance and
financial performance. Profit planning enables to minimize the future uncertainty
and risk, maximizes the output from the scarce resources and predicts the future in
order to avoid (overcome) the uncertainties.

In a geographically remote, economically and educationally backward country like

Nepal, it is indisputable that the development, expansion and proper mobilization
of the insurance sector can play an effective role in creating awareness and
consciousness to every citizen and bringing them into the mainstream of national
development. The present study lies in the role of sales budget (premium income
budget) in an insurance company which can play in not only profitability of an
organization but also the overall managerial performance and thereby
improvement in the insurance business.

This study tries to answers the certain questions as stated earlier in the statement
of the problem by using different financial and statistical tools. The most

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important aspect of this study is that it has tried to find out the real problem faced
by company for the application of the budgeting and also tried to give the suitable
way to apply the budgeting system in the company.

For the development of the economic condition of the Nepal, insurance companies
can play the vital role by providing better services to the citizen. It can also
provide the huge amount of fund to the government by purchasing different types
of government securities. That’s why there is a need of PPC, which can play vital
role for the collection of premium and other aspects of the insurance company
effectively.

1.5 Review of Previous Studies

1.5.1 Conceptual Framework

A sales budget estimates the sales in units as well as the estimated earnings from
these sales. Budgeting is important for any business. Without a budget companies
can’t track process or improve performance. The first steps in creating a master
company while budget is to create a sales budget. Management carefully analyzes
economic conditions, market competition, production capacity, and selling
expenses when developing the sales budget. All of these factors play an important
role in the company’s future performance. Basically, the sales budget is what
management expects to sell and the revenues collected from these sales.
Management often utilizes employees in various departments to help with the sales
and revenue estimates. For instance, management will most likely consult with the
sales department or salesmen to establish a reasonable sales goal for the future
year. The individual sales personnel have more experience and more knowledge of
current trends as well as customer territory than the upper level management does.
After management has gathered information from various departments, a sales
budget can be drafted.

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The sales budget not only sets goals for the company, it also provides a framework
for the other company wide budgets. Every other budget is based on the sales
budget. That is why the sales budget is the starting point for the master budget. A
company must know how many products it will sell and how much revenue will
be generated before it can determine purchasing budgets (www.google.com).

Profit
Usually Profit does not happen. Profits are managed. Before we can make an
intelligent approach to managerial process of profit planning, it is important that
we understand the management concept of profit. Generally, profit is known as a
part of income of the firms. Profit is the motivating force in the business. Success
of Business depends on profit. Profit promises to provide satisfaction to customer.
So profit is businessmen’s “pay off”. We can simply define the word “profit” as
primary measurement of success of management effectiveness in business
enterprise. In other word profit means the excess of total revenue over the total
cost of production. Usually profit doesn’t happen, they are managed or produced.
Profit can be represented as follows:

Profit = Total Revenue – Total Cost

P.N. Chopra’s views, Profit as, a residual income which accurse to the
entrepreneur after all types of payment have been made and all type of production
and slack expenses have been met.

There are after all several different interpretations of the term ‘Profit’. An
economist will say that profit is the reward for entrepreneurship for risk taking. A
labor might say that it is a measure for hour efficiently. Labor has produced and
that it provides a base for negotiating a usage increases. An investor will view it as
gauge of the return on his or her money. An international revenue agent might
regard it as the base for determining income taxes. The accountant will define it
simply the in the expenses of producing revenue in a given fiscal period.
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Using the accountant’s measuring sick management thinks of profit as:-
i) A tangible expression of the goals it has set for the firms.
ii) A measurement of performance towards the achievement of its goals.
iii) A mean of maintaining the health and growth of the company.

It is the ultimate objectives of management to maximize profit over the long term,
consistent with its social responsibility. To plan profit intelligently management
needs to know:-
i) The economic characteristics of the firm’s operations
ii) The nature of the market for its products.
iii) The nature and severity of its competition.
iv) The costs of its factors of production material, the labor, the productive
capacity, the capital.
v) The relationship of the price, it can get for its goods to the expense of
producing and selling them.

1.5.2 Review of Previous Research Work

Researchers in the area of management accounting practices in Nepalese contest

are not made. But many researchers have been made in the area of profit planning
and control in Nepalese context. As profit planning and control covers some of the
aspects of management accounting, researchers made on these areas are taken into
consideration for the sake of review to examine how profit planning and control
practices in Nepalese companies. Many of the researchers have been made of
manufacturing concerns and except a few most of them are not profound. An
attempt is made here to review some of the researches, which have been submitted
in profit planning and control in the context of Nepal.

Thapa (2014), “Profit Planning Din Media Printing Business; A Case Study of
Gorkhapatra Sansthan.” Thapa’s major concern in his research was the
examination of adaptation of profit planning and control programs in the

7
corporation. The data and other necessary information were collected form
secondary sources of data. In his research Thapa had pointed our various finding
some remarkable findings were as follow:
i. GPS is not properly following every steps of budgeting.
ii. No proper planning technique is followed.
iii. Capital budgeting practices is not proper since it lacks project evaluation
techniques such as PBP, IRR, NOV and PI.
iv. Failure due to inadequate forecasting system.

Lamichhane ( 2016), “Budget as a Tool of Profit Planning of Public Utility

Enterprises: A Case Study of NTC” this study has mainly deal with the aspect of
budgeting and examines the practice and effectiveness of profit plan in Nepal Tele
communication.

The objectives of Lamichhane’s study are as follows:

i. To examine practice and effectiveness of profit planning in NTC
ii. To observe the NTC’s profit planning system on the basis of budgeting
system.
iii. To provide suggestions for improvement of efficient planning or budgeting
of NTC on near future based on findings.

Findings:
i. Sales budget prepared by NTC according to the nature of its customers.
ii. Actual production lines in NTC are more fluctuated than budgeted
production line due to government influenced.
iii. From the analysis of profit plan in NTC there is no proper practice of cost
segregation into fixed and variable and there is no systematic approach to
record manufacturing costs.
iv. NTC has not practice to prepare projected profit and loss account and
balance sheet in advance.

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Adhikari (2018), “Profit Planning in Manufacturing Enterprises: A Case Study
of the Dairy Development Corporation”. This research has highlighted and
analyzed the problems and prospects in budget application and implementation
this research study has also tried to find whether new trend of DDC is positive and
perfect in case of profit planning and control or not.

The objectives of the Adhikari’s study is to find out practical application of PPC in
necessary recommendation on the same to increase the probability of the concern.
The following are the specific objective of Adhikari’s study:
i. To analyze the functional budgets on sales and production sector of the
DDC.
ii. To analyze various accounting ratios, measures the profitability and
efficiency of the DDC.
iii. To analyze the budget target and its achievement along with reason of
deviation, if any.
iv. To provide valuable recommendations and suggestions based on analysis.

Findings:
i. Production and sales of DDC is increasing annually although the growth
sale is fluctuated.
ii. The corporation has no proper practice of segregating cost into fixed cost
and variable cost.
iii. Most of the budgeted figures are higher than real (Actual) figure.
iv. Capacity utilization is very high but the production ratio is less.

Baral (2018),“Management Accounting Practice in Nepalese Insurance

Companies”. He has focused his study to study and examine the contemporary
practice of management accounting in Nepalese Commercial Banks. Barals’s
research is based on primary data. In his study, 17 Nepalese commercial banks are

9
included. He has pointed out various findings and recommendation in his study.
Of them, same remarkable findings are:
i. New management accounting techniques like Zero-based budgeting and
Activity based Costing are recommended to use instead of traditional
techniques
ii. It is recommended that band should create an atmosphere of interaction
between the academician and the banks. The banks can be benefited form
academician’s knowledge about new tools and techniques of management
accounting.
iii. Management Accounting Information System (MAIS) should be
maintained.

Kharel (2017), “Comprehensive Budgeting Process in Public Corporation in

Nepal: A special Study of Sales are Production Budgeting Process of DDC”. This
study is related with a profit planning in DDC. This study is tried to analyze the
strength and the weakness of DDC.
The Basic Objectives of Kherel’s study is to review the planning practices adopted
by DDC and its effectiveness. The general objective has been specified in the
following specific.
Objectives:
i. To analyze the budgeting system of DDC.
ii. To analyze profit planning process of DDC.
iii. To evaluate the financial performance of DDC.
iv. To interpret the trend of profit and loss

Findings:
i. DDC has not been clearly defined its goal or target briefly. It has planning
only for production and sales for coming fiscal year not in various areas i.e.
expansion of market development of product, profit margin etc.
ii. DDC has not separate planning department and planning exerts

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iii. DDC has not applied any inventory policy. The inventory has increasing
trend.
iv. The gap between actual production and actual sales has high.
v. The actual sales have lower break-even sales on research period that means
it has not considered BEP.

Ghimire (2018), “Sales Budgeting and Profitability in Public Enterprises: A case

Study of DDC.” Suman has also focus on the budgeting system and it is effective
of DDC.

Objectives:
i. To examine the sales budgeting process adopted by DDC
ii. To analyzed the relationship between sales and profitability of DDC.
iii. To compare the performance status of sales budgeting system of DDC.
iv. To find out the cause of deviation on sale budget of DDC.
v. To provide suitable suggestions and recommendations on the basis of
study.

Findings:
i. DDC is not using special plans and specific objectives for the
comprehensive profit plan. So, budgeting system was not based on
systematic projection. Either it was unrealistic
ii. Dairy Development Corporation followed short-term tactical sales plan
rather than long term strategic sales plan.
iii. There was no proper sales forecasting method. Sales forecasting were
done on the basis of personnel judgment of high level management of
various responsibility centers.
iv. The actual sales were always lower than budgeted sales. There was
positive correlation coefficient and positive regression equation (line)
for budgeted and actual sales.

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 v. Pricing policies of the corporation was not scientific and the
government interfered on the price of raw milk and milk products. The
board of DDC seemed as a showpiece.

1.6 Research Methodology

Research methodology is a general plan of how the researcher is going about

answering the research questions we has set. The research worked undertaken
following a systematic way, which is called the research methodology. This
chapter describes the research methodology or r research strategy employed in this
study. The major contents of research methodology are as follows.

1.6.1 Research Design

Research design is the plan, structure and strategy of investigation conceived to

obtain answers to research questions. Generally research design refers to definite
procedures and techniques. Which guide to study and propounds ways for research
viability.
Both analytical as well as descriptive design has been applied design for this
study; this study is closely related with the various departments of sales premium
collection of insurance company. And it is a case study of Everest Insurance
Company’s premium collection analysis.
1.6.2 Collection of Data

This study is based on secondary data. However primary data and information
have been obtained through informal discussions with the executives and other
related staffs of the EIC. The secondary data were collected from annual reports of
EIC, Balance sheet, profit and loss A/C. cost detail sheet EIC’s website and other
relevant published and unpublished documents of Everest Insurance Company..

12
1.6.3 Period Covered

The time period of Five years are covered by this study form F/Y 2070/71 to
2074/75 for purpose of trend analysis. Analysis is basically made on the basis of
these five years data, which is provided by EIC.

1.6.4 Tools of Analysis

After collecting the data from various sources they are managed analyzed and
presented in proper tables and forecasts which are interpreted and explained as
necessary. There are mainly two types of tools used to interpret the data. One is a
financial tool and another is a statistical tool.

1. Financial Analysis Tools

Generally, the financial analysis tools mainly are used for the purpose of the
assessment of the financial position of a particular organization.

1. CVP analysis
a. Contribution Margin
Contribution Margin (CM) = sales value — variable cost or. Contribution Margin
(CM) = Profit + Fixed cost
b. Profit Volume (PV) Ratio
Contribution Margin
Profit Volume (PV) Ratio =
Sales
c. Break Even Point
¿
Break Even Point in Rs = Total ¿ Cost PV Ratio
d. Margin of Safety
Margin of Safety' (MOS) = Total Sales - Break Even Sales
MOS
% of MOS = × 100∨¿
Sales
Actual Sales−BEP Sales
=
BEP Sales

2. Statistical Analysis Tools

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Statistical methods are the mathematical techniques used to facilitate the analysis
and interpretation of numerical data secured form groups of individuals or groups
of observations from a single individual. The figures provide detailed description
and tabulate as well as analyze data without subjectivity, but only objectivity. The
results can be presented in brief and precise language and complex and
complicated problems can be studied in very simple way

i. Arithmetic mean ( X )

Average is statistical constants, which enable us to comprehend in a single effort

of the whole. It represents the entire data by a single value. It provides the gist and
gives the bird's eye view of the huge mass of unwieldy numerical data. It is
calculated as:

X=
∑X
N
Where,
X = Arithmetic Mean
N=¿ Numbers of observation
∑ X=¿ Sum of observation
ii. Standard Deviation (S.D.)

The standard deviation is the square root of mean squared deviations from the
arithmetic mean and is denoted by S.D. or σ It is used as absolute measure of
dispersion or variability. It is calculated as:

σ =√ ∑ ¿ ¿ ¿ ¿

Where,

σ =¿ Standard Deviation

iii. Coefficient of Variation (C.V.)

The co-efficient of variation (C.V.) is the relative measure based on the standard
deviation and is defined as the ratio of the standard deviation to the mean
expressed in percentage, it is independent of units. Hence, it is a suitable measure
for comparing variability of two series with same or different units. A series with
14
smaller C.V. is said to be less variable or more consistent or more homogeneous or
more uniform or more stable than the other and vice versa. It is calculated as:

σ
C.V. = × 100
X
Where,
σ = Standard deviation
X = Mean
iv. Correlation Coefficient (r)
Correlation Coefficient is the important tool to analyze the degree of relationship
between two or more variables. It is used t describe the degree to which one
variable in the linearly related to other variables. It refers the closeness of the
relationship between two or more variable. In other words, it is an analysis of
covariance between two or more variables.
It is the statistical measure of the relationship. If any, between series of numbers
representing data of any kind, from returns to test scores. If two series move in
opposite direction, they are positively correlated; if the series move in opposite
direction, they are negatively correlated.
The degree of correlation is measured by the correlation coefficient, which ranges
from +1 for perfectly correlated series to -1 for perfectly negatively correlated
series. Symbolically, correlation coefficient can be expressed as follows:
n ∑ xy−∑ x . ∑ y
CorrelationCoefficient ( Simply , r )=
√¿ ¿ ¿
Correlation analysis describes the relationship between variables i.e. positive or
negative. It helps to determine the following.
A positive or negative relationship exists.
The relationship is significant on insignificant.
Establish cause and effect relation if any.
The statistical tool-correlation analysis is used in the study to measure the
relationships between variables in determining within the relationship is

15
significant or not. For the purpose decision making interpretation are based on the
following terms.
1. When, r = 1, then is perfect positive correlation.
2. When, r = 1, then is perfect negative correlation.
3. When, r = 0, then is no correlation.
4. When, 'r' lies between 0.7 to 0.999 (-0.7 to 0.999), then is high degree of
positive (or negative) correlation.
5. When, 'r' lies between 0.5 to 0.6999 there is moderate degree of correlation.
6. When, 'r' is less than 0.5, there is low degree of correlation .
v. Probable Error (P.E.)
The probable error of the Coefficient of correlation helps in interpreting its value.
With the help of probable error, it is possible to determine the reliability of the
value of the coefficient in so far as it depends on the conditions of random
sampling. The probable error of the coefficient of correlation is obtained as
follows:
1−r 2
P.E. = 0.6745 x
√N
Where,
r = Correlation coefficient
N = Number of pairs of observations
If the value of 'r' is less than the probable error, there is no evidence of correlation.
i.e., the value of 'r' is not at all significant. Then, if the value of 'r' is more than six
times of the probable error, the coefficient of correlation is practically certain, i.e.
the value of 'r' is significant.

f) Trend Analysis
Time series analysis enables us to forecast the future behavior of the variables
under study, changes in the values of different variables and past behavior of a
variable. In the data related to time span, there are three components of time series

16
like secular trend or long term fluctuation, short term or periodic variations and
random or irregular fluctuation.

Y=a+bx
The above trend equation can be calculated using following two normal equations:
∑ Y = na bƩX………………………… (i)
∑ XY = aƩX +b Ʃ X 2……………………(ii)
Where,
Y = Variable
X = Time span

1.7 Limitation of the Study

The scope of the study is limited as this study confined only to the budgeting and
profit planning of EIC. Following factors will limit the scope of this study.
i. Only last five years trend and data will be analyzed.
ii. Analysis will be concentrated only on sales of policies and it does not cover
the other areas of the enterprises.
iii. Time and resource constraints may limit the areas covered by the study
iv. There are only few published book and articles regarding insurance business.
So the writing of this report has to depend on limited information available.
v. Availability of relevant data and other information will determine its scope
vi. Only Everest insurance company’s Premium collection is taking
consideration.

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 CHAPTER - II
RESULT AND ANALYSIS

2.1 Data Presentation

After collecting the data from the various sources, it should be presented, analyzed
and evaluated by using the different tools and techniques to find out the various
aspects of the company. Data presentation and analysis is the main part of any
research work. In other words, it is the heart of any research work. The data and
necessary information are collected through primary and secondary source. To
analyze and evaluate the actual position of the company different tools like
financial and statistical tools are used. Under the financial tools, ratio analysis is
used to find out the financial position and efficiency of the company. Statistical
methods like correlation between the different variables, trend of the budgeted
sales and actual sales, Standard deviation, Coefficient of Variation, Testing of
hypothesis etc. are used to find out the various aspects of the company.

The main objectives of the study to examine the Practice of Sales Budget
(Premium Income Budget) of EIC in the context of profit planning and control, for
this purpose, EIC has been taken. To accomplish the objectives, this chapter will
analyze the profit planning system in EIC and then presents the actual position of
profit planning. It is also tried to compare the actual and budgeted sales of EIC.

The present study has tried to analyze the functional budgets that are prepared by
EIC in order to know the overall economic and financial trend and to estimate the
possible future trend of corporation. For this purpose, mainly Five years data that
is provided by EIC is taken into consideration.

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2.1.1 Sales Planning of EIC

Sales Revenue Planning is the foundation for planning in business organization. It

is the primary step in developing the overall budget procedure and it is the primary
source of cash and all other functional budgets prepared on the basis of sales
budget. If sales budget is not realistic all other budgets also will not be realistic.

Sales plan is prepared on the basis of sales forecast, generally salesperson and
sales forecast are used as same sense but they are not the same. A sales forecast
has to be translated into sales plan and various factors have to be taken into
consideration. Sales plan preparation involve the following four interrelated step.

i. The sales forecast

ii. The marketing plan
iii. The advertising and expense budget and
iv. The selling expense budget.

The overall responsibility of preparing sales budget is upon the sales manager
(marketing manager in EIC), although chief executive should also be involved in
such activities.

EIC has a practice of planning revenue for the coming fiscal year and it also
forecasts the demand of the insurance policy in the short term and long term. Sales
budget is prepared by EIC according to the sale plan of the marketing senior staffs
and Development Officers. Whatever the target is give to its Development Officer
and other marketing senior people, the further forecasting is done on the basis of
historical achievement. The company has the system of the meeting regularly.
Every marketing people fill up their target and provide to the marketing manager.
Short-term planning is divided as weekly, monthly and yearly.

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EIC provides the annual targets to its marketing people as per their achievement,
they get the level of recognition and they will get the more facilities as per the
rules and regulations of the company. It is not concentrated in head office only, the
same rule is applied to the other employee of the various branches which are
established in main cities of Nepal.

2.1.2 Sales Budget of EIC

Sales budget is the first step to prepare overall budgets procedure. On the basis of
sales budget, all other functional budgets are prepared. If sales budget is not
realistic, other parts of the comprehensive profit plan will not be realistic. So it
should be realistic. Sales budget is the primary source of cash which opens the
door of financial plan.

EIC has been providing its services in the urban areas as well as far area through
its eight branches. It prepares the sales budget on yearly basis. In the context of
Nepal, a few insurance companies are preparing two periodic profit plans.
Generally, EIC prepares the short term sales budget on yearly basis. The short
term sales plan is divided into weekly monthly, three monthly, half-yearly. It gives
the sale target to all the marketing seniors of the different branches and evaluates
the achievement made by them. It has no clear-cut Five years sales plan i.e. long
term plan mainly, it is concentrated in short term sales plan only.

The following table shows the sales budget target and achievement trend of EIC
from fiscal year 2070/71 to 2074/75. The table shows the budgeted sales of EIC
which is in increasing trend. In the history of company, it has never failed to
achieve the budgeted sales and it has achieved its targets very excellently.

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 Table 2.1

Budgeted Sales and Actual Sales

(Amount in Million)
Detail
Budgeted Sales Actual Sales Change in %
Year (X) (Y)
2070/71 200.00 207.04 3.5%
2071/72 210.00 222.96 6.5%
2072/73 246.00 248.69 1.1%
2073/74 300.00 338.96 22.99%
2074/75 410.00 449.83 9.71%
Source: Annual Report of EIC
From the above table, we can see that its actual sales are always higher than the
budgeted sales. The highest achievement is 22.99% in FY 2073/74 and lowest
achievement is 1.1%in FY 2072/73,. We can also say that there is a good
management skill to forecast the sales budget during the period.

The budgeted and actual sales of EIC can also be presented from the following
line chart. The line chart shows the trend between these two sales budgets.

Figure 2.1
Budgeted Sales and Actual Sales

500
450
400
350
Amount in Million

300
250
Budgeted Sales
200 Actual Sales
150
100
50
0
2061/622070/71
2062/63 2071/72
2063/642072/73
2064/65
2073/74 2065/66
2074/75
Fiscal Year

Source: Table2.1

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To find out the nature of variability of target sales and achievement sales of
different years, we have to calculate the arithmetic mean, standard deviation and
co-efficient of variation. EIC’s sales target and sales achievement for 5 years
period from FY 2070/71 to FY 2074/75 are summarized as under:

S No. Particulars Budgeted Sales (X) Actual Sales (Y)

1. Mean 273.20 293.50
2. S.D. 76.84 90.52
3. C.V. 28.13 30.84%
Source: Appendix No. I

The above analysis shows that a budgeted sale (X) is smaller than Actual sales (Y)
and standard deviation of Actual sales is greater than budgeted sales. There is
difference between co-efficient of variation of budgeted sales and actual sales. Co-
efficient of variation of budgeted sales is less than the actual sales. The
distribution of greater CV is said to be heterogeneous or variable than other. And
smaller CV is said to be more homogeneous or union or less variable than other.
According to this principle, EIC’s actual sales are flexible and heterogeneous than
budgeted sales.

To find out the correlation between budgeted figure and actual figure Karl’s
Person Co-efficient of Co-relation (r) is determined. For this purpose let us
consider budgeted sales (X) is independent and sales achievement (Y) is
dependent variable. By calculation (r) we can examine whether there is positive
correlation between budgeted and actual sales or not.

From Appendix No. I

We have,
r = 0.996
PE ( r ) = 0.0024
6 PE = 6 x 0.0024 = 0.0146

22
The value of (r) is 0.996 which shows that there is high positive correlation
between budgeted sales and actual sales. It means actual sales are satisfactory on
budgeted sales.

By above all calculated value, co-efficient of correlation (r) is 0.996, which is

greater than Probable Error (i.e. 0.99>0.0146). Which shows the value of r is
definitely significant. So it can be said that sales will go same direction that of
budgeted sales.

Another statistical tool, least square method can also be used to analyze the trend
of actual sales and to estimate the possible future sales for the given year. Least
square method also shows the relationship between years (time) and actual sales.
By the help of least square method, we can analyze the sales and year (time).

Table 2.2
Fitting straight-line trend by using Least Square Method
(Amount in Million)
Year Actual Sales(y) x=X-A x2 xy
2070/71 207.04 -2 4 -414.08
2071/72 222.96 -1 1 -222.96
2072/73 248.69 0 0 0
2073/74 338.96 1 1 338.96
2074/75 449.83 2 4 899.66
Total 1467.48 10 601.58
Source: Annual Report

We Have,

Straight line trend (Y) = a + bx

23
Where

∑ Y 1467.48
a= N ¿ 5 = 293.50

∑ xy 601.58
b= ¿ = 60.16
∑ x2 10

Now, substituting the value of ‘a’ and ‘b’ as following:

Y = 293.50 + 60.16X

This trend line favorable sales figure for the future. The sales will be increased by
60.16 million every year if the trend of past years continuous in the future.

By using trend equation, we can estimate the actual sales for the FY 2075/76.
Where the value of x for the year 2075/76 = 3 ( FY 2072/73 base year).

Sales for 2075/76 = 293.50+ 60.16 x 3

= 473.98 Million.

It can said that if the trend does not change the possible sales for the FY 2075/76
will be Rs. 473.98 Million.

2.1.3 Man Power Planning (Allocation) Budget of EIC

Manpower planning is one of the most important tools in each and every
organization. All the functions of the enterprises are performed by personnel. The
whole life of the enterprise depends on the manpower planning. This budget points
out the estimate of manpower requirements necessary to produce the service and
product. To apply the concept of profit planning in public utilities, effective
planning and controlling of manpower cost is highly essential.

Manpower planning includes; a.) Personnel needs b.) Recruitment, c.) Training,
d.) Job Description and Evaluation, e.) Performance Measurement, f.) Union

24
Negotiation, g.)Wages and Salary Administration etc. A Profit Planning and
Control program can not resolve special personnel problems, but it directs careful
consideration to them and aids in placing them in perspective. Effective planning
and control of long-term and short-term labor cost will benefit both the company
and its employees.

Table 2.3
Man Power Allocation by yearly
Fiscal Year 2070/71 2071/72 2072/73 2073/74 2074/75
Detail
No of Branches 4 5 5 5 5
No of Liason Office 3 3 3 3 3
No. of Staff 64 60 60 62 68
Source: Annual Report of EIC

2.1.4 Ratio Analysis of EIC

Fire to Total Premium Collection

It is the ratio used to measure the contribution of fire premium collection in total
premium collection. It revels the weight of fire premium collection over the total
premium collection by EIC. It is calculated by using the following equation.

Fire Premium to Total Premium Collection

Fire Premium Collection

=
Total premiumCollection

Table 2.4
Fire Premium to Total Premium Collection

25
 (Amount in ‘ 000’)
Year 2070/71 2071/72 2072/73 2073/74 2074/75

Detail
Fire 52704 59355 66179 76186 81855
Total 207039 222976 248686 338964 449834
Ratio 0.2545 0.2662 0.2661 0.2248 0.1820
Source: Appendix - VI

From the above table the contribution of Fire insurance premium collection over
total premium collection is growing in first three years (2070/71 to 2072/73), and
last two year 2073/74 &2074/75 decrease the ratio. It can also be presented clearly
from the following chart.

Figure 2.2
Fire Premium to Total Premium Collection by Year Wise
500000
450000
400000
350000
Amount in '000'

300000
250000
200000 Fire
Total
150000
100000
50000
0
2061/62
2070/712062/63 2063/64 2073/74
2071/72 2072/73 2064/65 2065/66
2074/75
Fiscal Year

Source: Table2.4

From the above line chart the fire premium is in increasing each year gradually
and highest contribution is in year 2072/73. It is suggested to keep the same type
of collection to maintain the highest contribution like previous year

26
2.1.5 Motor Premium Collection to Total Premium Collection

It is the ratio used to measure the contribution of motor premium collection in total
premium collection. It revels the weight of motor premium collection over the
total premium collection of EIC. It is measured using the following equation.

Motor Premium Collection to Total Premium Collection

Motor PremiumCollection
=
Total Premium Collection

Table 2.5
Motor Premium Collection to Total Premium Collection
(Amount in ‘000’)
2070/71 2071/72 2072/73 2073/74 2074/75
Year

Detail
Motor 47688 46461 57027 117837 194519
Total 207039 222976 248686 338964 449834
Ratio 0.2303 0.2084 0.2293 0.3476 0.4324
Source: Annual Report

From the above table, the contribution of motor insurance premium collection over
total premium collection is constantly growing in each year. There is highest
contribution in FY 2074/75 and lowest contribution is in he Fiscal Year 2071/72.

It can be also be presented clearly from the following Line Chart.

Figure 2.3
Motor Premium Collection to Total Premium Collection

27
 500000
450000
400000
Amount in '000' 350000
300000
250000
Motor
200000
Total
150000
100000
50000
0
2061/62
2070/71 2062/63 2063/64
2071/72 2072/73 2073/74 2064/65
2074/75 2065/66
Fiscal Year

Source: Table 2.5

From the above chart it is clear that the motor Premium is increasing in the year
2070/71 to 2071/72 and year 2072/73 decrease then last two increasing regularly.
Here the ratio and collection are fluctuation, here early year increasing and mid
-year decrease and lastly increasing trend.

2.1.6 Marine Premium Collection to Total Premium Collection

It is the ratio used to measure the contribution of marine premium collection in
total premium collection. It revels the weight of marine premium collection over
the total premium collection of EIC. It is measured using the following equation.

Marine Premium Collection to Total Premium Collection

Marine Premium Collection
=
Total PremiumCollection
Table 2.6
Marine Premium Collection to Total Premium Collection
Amount in ‘000’
Year 2070/71 2071/72 2072/73 2073/74 2074/75

Detail
Marine 22169 20293 18810 16833 15513

28
Total 207039 222976 248686 338964 449834
Ratio 0.1071 0.091.0 0.0756 0.0497 0.0345
Source: Annual Report

From the above table, the contribution of marine insurance premium collection
over total premium collection is constantly in ht year 2071/72 to 2074/75. There is
highest contribution in the FY 2071/72 and lowest contribution is in FY 2072/73.
The various factors have been played to decrease the contribution in total
premium. It can be also presented clearly from the following chart.

Figure 2.4
Marine Premium Collection to Total Premium Collection
500000
450000
400000
350000
Amount in '000'

300000
250000
200000 Marine
150000 Total
100000
50000
0
2061/62 2062/63 2063/64 2064/65 2065/66
2070/71 2071/72 2072/73 2073/74 2074/75
Fiscal Year

Source: Table 2.6

From the above line chart, it is clear that there is constantly decreasing the
contribution of marine premium in year 2070/71 to 2074/75. It is suggested that to
maintain the constant growth rate in future.

2.2 Major Finding of Studies

The above analysis of various functional budgets, financial budgets their

achievement, the sales budget and its achievement, product wise income and
expenditure, overhead budget, ratio analysis, hypothesis testing and correlation

29
coefficient shows the various indications during the periods. EIC has been
suffering with various internal and external problems in the process of formulating
and implementing profit plans. EIC is a leading company and its expenses also
increasing each fiscal year. So the most important consideration thing is cost
control and profit management.

The following major findings have drawn on the basis of different analysis,
questionnaires, observations and informal discussions with the concerned
employees of EIC.

i) There is no systematic classification of overhead expenses.

ii) There is no practice of PPC except sales(Premium) budget and cash budget.
iii) The company has never failed to achieve its targets. The budgeted target is
achieved excellently.
iv) EIC has no clear-cut vision and concept of comprehensive profit planning
system.
v) Expenses trend of the EIC is increasing each year.
vi) There are high degree of positive correlation between the budgeted sales
(Premium) and actual sales (Premium).
vii) Expenses trend of the EIC is increasing each year.
viii) There is fluctuation in the Miscellaneous Premium Collection and Motor
Premium collection ratio and constantly growing fire, Engineering.
Department premium collection ratio is decreasing each year.
ix) Judgment productivity ratio shows that productivity of EIC is increasing
each year profitability ratios are increasing each year and there is positive
sign about activity ratio also. Judgment stability ratio like current ratio is
maintained standard. Judgment possibility ratio shows that, there is high
possibility of existence of the company in the insurance sectors.
x) Product wise income and expenditure accounts shows that income is
increasing each year until FY 2073/74 and expenditure increase is lower

30
 rate comparison to income, But last year 2074/75, Expenditure increase rate
is greater than income increasing rate.

CHAPTER - III

SUMMARY, CONCLUSION & SUGGGESTIONS

3.1 Summary

Profit planning and control is the systematic and continuous process. It is the
process of planning, organizing, staffing, leading, co-ordination and controlling of
all the operations of an organizations. It is one of the most important management
tools, which is used to plan and control business operations. Budgets or plan can
be treated as a guide for efficient operations for future. Profit planning is important

31
for success of any types of organization. The success of organization is measured
by profit. The profit is the path for the activities of every enterprise.

Sales pan is the starting point in the preparation of the comprehensive profit
planning and control. All the other plans and budget depend upon the sales budget.
The budget is usually presented in amounted (premium collection) in insurance
company. Sales' planning is the estimation of expected future sales. Success and
failure of the organization depends upon sales budgeting. The main purpose of
sales planning is to reduce uncertainty of the future premium collections in
insurance company.

Sales budget is related with premium collection and it is prepared by focusing the
relevant variables estimated for the future and desire profit of every corporation.
Generally, there are two types of comprehensive planning. One is strategic long
range planning. It is prepared for more than two year and short range planning is
related to one-year period.

Insurance companies are one sector of economy as they safeguard against the risk
that exists in business as well as in human daily life. Everest insurance company
has limited resources which should be mobilized in such a way that it can get its
best. For better utilization of resources, different tools and techniques have been
developed. Among them, a sales budget is the best tool of managerial activities.

Sales budget is one of the important disciplines of accounting. It’s main objectives
is to help mangers in overall managerial activities by providing various
information and helping in planning and decision making.

The study was done with an objective to examine the present practice of sales
budget in Everest insurance company and it can be applied to strengthen the
financial positions. With respect to this objective, the present research has explore
the real position of applicability of premium collection planning in Insurance
companies (ex. Everest Insurance company).
32
Analytic and descriptive research design is followed mainly based on secondary
source of data has been used, statistical tools like; mean, standard deviation,
correlation coefficient, testing of hypothesis etc. have been used to analyze the
data. Similarly, financial tools like financial ratio have been used. The present
study is under taken to examining the role of sales budget (premium collection) is
as insurance company with special reference to EIC. This study has tried to answer
of certain questions stated in the statement of the problem.

The study has tried to examine profit plan system specially role of sales budget
(premium collection budget) of EIC. The scope of the five year data from FY
2070/71 to FY 2074/75 has been examined. This study has been organized into
five chapters consisting of Introduction, Review of Literature, Research
Methodology, Data presentation and Analysis and Summary, Conclusion and
Recommendations. Hence it is divided in to five chapters.

3.2 Conclusions

After analyzing the present practice of profit planning in EIC the study concludes
the following:-

There is not complete and comprehensive budgeting system. EIC does not prepare
long-term strategic profit plan but prepares a short-term profit plan, which is
referred as budget. The time period covered by the short term budget is one year
generally detailed by time. There is no systematic and scientific manner of
expenses by EIC. All the expenses are including in management expenses.

Five year’s department wise income and expenditure shows that the income
growing rate is higher than expenditure growing rate except fiscal year 2074/75.
From the department wise ratio analysis shows that there is constant growth in
fire, engineering premium collection is increasing each year, and marine premium
collection ratio is decreasing each year. Miscellaneous premium collection and
Motor premium collection ratio is fluctuation.
33
The company has hot used the financial ratio analysis. Using the financial ratio it
is found that the productivity of the company is increasing each year which is a
positive sign to the company. Judgment profitability ratio, total capital profitable
ratio is increasing except fiscal year 2073/74. Gross margin ratio is increasing but
Net profit margin ratio is increasing except FY 2073/74. Own capital ratio is
fluctuation in each year. These judgment profitability ratios show that the
company is able to earn the profit. Judgment activity ratio (i. e. total capital
turnover ratio and current assets turnover ratio) shows increasing in each year
which is positive sign to the company. Manpower allocation (Planning) shows that
the number of employees in the branch is low and total number of employees in
each year is increasing.

Duties and responsibility are not clearly identified between various levels of
management. In other words, there is no job description provided to each level of
employees. he company is paying the high amount of premium to the foreign re-
insurance companies and also they are bearing risk by paying the claim as well.

The management has no clear-cut vision about the comprehensive profit planning
and control system. The company can get the maximum advantages from the use
of comprehensive profit planning, especially sales budget (premium income
collection budget). Profit planning and control can be used in any type of
organizations whether it is small or big, profit oriented or service oriented,
manufacturing or non-manufacturing. It can cover all the organization if it is not
able to cover it should be tailored to fit in any type of organization. Sales budget
plays the vital role for the existence, grow, stability and to meet all the obligations
in future.

A profit planning and control program helps the management perform its planning
function by developing a strategic (long-range) profit plan and a tactical (short-
range) profit plan. Both of these plans include monetary expectations (i.e. goals)

34
for assets liabilities, profits and return on investment. The foundation for the
strategic profit plan (Usually extending three, five to ten years into the future)
includes the objectives, broad goals, planning premises, and strategies of the
enterprises as developed by top management. The tactical (short-range) profit plan
can actually be viewed as the first year of the strategic profit plan. It is the detailed
plan for the enterprise and for each of its responsibility centers.

A PPC program helps management perform its control function by providing

realistic goals and standards that are implemented and are them compared with
actual results to measure performance. Under PPC this performance measurement
extends from the top to the lowest organizational level in the enterprise.

REFRENCES

Books

Armstrong, N. (2000). Long-Range Forecasting. Engle Wood Cliffs: N.J. Prentice

Hall

Claire, F.G. (2002). Insurance Principles and Practice. New York: John Willey

and Sons.

Ghos, M.K. (2004). Insurance Principles and Practice Legislation. Allahabad:

The Indian Press P. Ltd.

35
Joshi, P.R. (2008). Research Methodology. (2nd Edition). Kathmandu. Buddha

Academic Publishers and Distributors Pvt. Ltd.

Mishra, M.N. (2010). Insurance Principles and Practices. New Delhi: Vikash

Publishing House.

Pandey, I.M. (2012). Management Accounting. New Delhi: Vikash Publication

House Pvt Ltd.

Tikadia, D.C. (2014). Principles of General Insurance. Bombay: Sri S.M.

Dhakras, Secretary General Insurance Institute of India.

Welsch, G.A.,(2016). Budgeting: Profit Planning and Control. (15th Edition). New

Delhi: Prentice- Hall of India.

Websites

www.google.com

APPENDIX- I

Fiscal Budgeted Actual dx=X- dy=Y-300 dx2 dy2 dx.dy

Year Sales (X) Sales 246
(Y)
2070/71 200 207 -46 -92.96 2116 7161.6384 4276.16
2071/72 210 223 -36 -77.04 1296 3952.9224 2773.44
2072/73 246 248.7 0 -51.31 0 -1999.0376 0
2073/74 300 339 54 38.96 2916 5837.3768 2103.84
2074/75 410 449.8 164 149.83 26896 -4872.4716 24572.12
n=5 ∑ X=¿ ¿ ∑ y=¿ ¿ ∑ dx=¿ ¿ ∑ dy= ∑ d x 2= ∑ d y 2=¿ ∑ dx . dy=¿ ¿
1366 1467.48 136 -32.52 33224 10080.43 33725.56
Here, n=5

36
For Budgeted Sales (x)
mean X =A +
∑ dx =246+ 136
n 5
= 246+27.2=273.2
∑ d x 2 −¿ ¿
Standard Deviation (σ x =
√ n
33224
=
√5
−¿ ¿

= 76.84
σx
Coefficient of Variation (CVx) = X
76.84
= 273.2 x 100 %
= 28.13%
For Actual Sales (y)
Mean Y = A +
∑ dy =300+ −32.52
n 5
= 300-6.5=293.5
∑ d y 2 −¿ ¿
Standard Deviation (σ y =
√ n
10080.43
=
√5
−¿ ¿

= 90.52
σy
Coefficient of Variation (CVy) = Y
90.52
= 293.5 x 100 % = 30.84%

37