Cash Management Perfomance

1. Background of the Study

For having sufficient amount of capital, cash is the most important source of every aspect of investment. To improve the performance of the business as well as to introduce new business opportunity in the organization cash is very important. Since cash is the most powerful working capital component, the collection and payment of cash must be studied carefully.

Therefore, this project tries to show how cash is controlled and managed by taking United Bank S.Co. as a representative from the real world practice. United Bank S.Co. is a service giving organization. Its main activities are Commercial banking activities, encourage mobilization of savings, and encourage international banking activities-which is import & export, and provides loans & advances to the economic sectors.

United Bank S.Co. operates and mange’s it cash in many ways. United Bank S.Co. collects cash form it’s customers in many ways and documents used for collections and also sources for cash are discussed. Cash management is very important factor in United Bank S.Co. because it mobilize so much amount of cash. Therefore, so as to achieve their organizational goal cash management is very much essential.

2. Statement of the Problem.

Mobilization of financial resource arises from the fact that the amount of financial resources for the purpose of productive investment is very low. In order to relieve financial constraints an investment; financial intermediaries are expected to play a decisive role in bringing about efficient ways of raising the required level of funds through the application of proper financial management system.

Now a days, in every developing countries the issue of economic development is the problem of managing scarce resources especially managing cash in an effective and efficient way for bringing a better economic growth of a country.

As it is known cash is the most important factor in banking operation it needs detailed management system. And in this study the researcher’s tries to answer the following basic question in cash management: • How does the bank control and mange it’s cash?

• Does it have a good internal control over cash?
• Does the bank have procedures and policy manuals with regard to cash control and management? If so, does the bank’s personnel follow the procedures and policies set by the organization? • What measures should be taken for the future, if there is mismanagement over cash?

1.3. Choice of an Organization

United Bank S.Co. is taken as a representative for the project paper due to:- • Willingness from the company.
• Co-operation from the staffs.
• Availability of documents, manuals, handouts, & annual reports. • Having knowledge about the company and
• The topic that is studied has so much relationship with the company

4. Reason for Selecting the Topic

The researchers choose the company studied in the project is a bank i.e. United Bank S.Co. Uited Bank S.Co. is an intermediary financial institution that operates a banking services. In order to operate smoothly cash is the most important factor. Because of its nature and being most important component of the organization cash management of the organization must be studied in depth.

5. Objectives of the Study.

The over all objectives of the study are to assess the cash management performance of United Bank S.Co. And to find out the problems related with cash management.

1.5.1. General Objectives of the Study is:-

• To have a broader knowledge about cash management.
• To see the role of banks regarding cash management.
• To assess the procedures of cash management that should be followed.
• To see practical aspects regarding cash management.
• To see whether there is a good internal control over cash or not?

1.5.2. Specific Objectives of the Study is:-

• To assess the strength and weakness with regard to the Cash management system in Dashen Bank.
• To compare and contrast the actual practice of United Bank with the theoretical aspect. • to assess the cash budget analysis of United Bank

• To assess administration of cash in the organization • To give some constructive suggestion and recommendation based on the facts of the study.

6. Significance of the Study.

The study will attempt to find out problems related with cash management. And thus, it will provide valuable information and better approach to deal with maintaining good cash management level in the organization.

Furthermore, it will be helpful for the management of United Bank S.Co. to assess their management style in which in term had impacts on cash management of the organization.

Finally, it may contribute for further research studies under taken under this area.

7. Scope and Limitations of the Study.

1.7.1. Scope of the Study

The topic is mainly concerned with the most liquid current asset i.e. how cash is budgeted, collected, and disbursed. It is some how narrow in scope and largely focuses on cash management analysis of United Bank S. Co.

1.7.2. Limitation of the Study

The researcher has faced some problems in conducting this study some of those are as follows:- • Lack of available materials and researches that are relevant to the study. • Time and data constraints

• Absence of industry average in the country, which could have been helpful in comparing the ratios.
• Confidentiality of the information.
• Forces from other courses.
• Lack of prior research experience.

8. Research Methods.

1.8.1. Methodology.

The data were collected form both primary and secondary sources. In order to finalize the study the main source of data are secondary source of data that consist of published materials, manuals, annual reports and other materials which are available with in the organization.

In addition to the above source of data the researcher also use primary sources of data, which is observation and interview, conducted with Accounts department section head; Assistant manager, Accountant and secretary of bole branch consisting of items dealing with background, objectives and major activities of the bank.

1.8.2. Data Analysis Methods

Many analytical techniques including those involving variety of financial ratios are available for cash management analysis. The methods that will be applied in the study are trend analysis, descriptive analysis and ratio analysis supported with tables and percentages.

9. Organization of the Paper.

The study comprises four chapters, these are: – Chapter One – presents the introduction part; which includes back ground of the study, statement of problem, choice of organization, reason for selecting the topic, objective of the study, significance of the study, scope and limitations of the study, research methods, organization of the paper; Chapter Two – deals with literature review; Chapter Three- also deals with data presentation and analysis of Dashen Bank S.Co.; and Chapter Four- presents the researcher’s conclusion and recommendation.

CHAPTER TWO

LITRATURE REVIEW

2.1. Definition of Cash, Management and Cash Management Cash

Cash is the money, which a firm can disburse immediately with out any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank accounts. Some times near-cash items, such as marketable securities or bank times a deposit of near-cash asset is that they can readily be converted into cash [PANDEY, 1999].

Cash is the most important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis, it is also the ultimate output expected to be realized by selling the services or product manufactured by the firm.

The birth of money came as a multifold blessing to mankind. And its functions are
• Money as unit of value or account
• Money as a medium of exchange
• Money as a standard of deferred payments
• Money as a store of value
Management

As quoted in Richard pettinger [1997) Henri Fayol defines management as process of “Forecasting, planning, organizing, commanding, coordinating and controlling “.

E.E.L breach called it “It is the social process of planning, coordination, control and motivation”.

Writing in the 1980’s Tom Petters defined management as “organizational direction based on sound common sense, pride in the organization and enthusiasm for its works. It is clear the management is a partly the process of getting things done through people; and partly the creative and energetic combination of the skill and talent of the individuals Concerned with doing things.” [Pettings,1997).

Cash Management

Cash management is in general of major important item in business enterprise because cash is a means of acquiring goods and services. Thus, the goal of cash manger is to maximize the amount of cash the firm must hold for use in conducting its normal business activities, yet at the same time, to have sufficient cash to take trade discount, to maintain its credit ratings and also to meet unexpected cash needs.

Cash and bank balances should be kept to a minimum, as they [usually] earn nothing for the firm, but care must be taken to ensure that activities are not restricted through a shortage of ready cash to pay employees and creditors. Finance must obviously be set aside to meet taxation liabilities, pay dividends and invest in capital expenditure. However, until such payments become due, the cash may be profitably invested in short-term investments. [FTC FOULKS LYNCH, 2006]

2.2. Issues Involved in Cash Management

The cash management is generally centered on forecasting and internal controls. The responsibilities of management with respect to cash are: 1. The preparation and use of cash budgets
– To ensure that there is sufficient cash to carry on operations 2. The management of short-term cash investments
– To invest any idle cash.
3. The management of overdrafts and bank loans
4. To prevent loss of cash due to theft or to misappropriation 5. The use of cash management models

3. Cash Balance Requirements [ Motives]

There are four major requirements that must be satisfied if the goal of meeting the corporation’s cash needs to be attained. The requirements are: • Transaction requirements
• Precautionary requirements
• Speculative requirements
• compensating balance requirements

2.3.1. Transaction Requirements

The transition requirements are the amount of cash needed to meet the forecast out flows contained in the firm’s cash budget.

2.3.2. Precautionary Requirements

The precautionary motives are the amount of cash needed to meet unanticipated cash payments. Cash balance held for precautionary requirements reflects the uncertain of future cash flows. It is a common practice; however, to keep at
least some of the forms precautionary balances invested in marketable securities.

2.3.3. Speculative Requirements

The speculative motives are the cash balance that is held by the business venture to take the advantage of bargain purchase that might arise.

2.3.4. Compensating Balance Requirements

Compensating balance are the amounts of cash needed to meet certain lending terms of commercial banks. For example, a corporation applies to a commercial bank for $ 100,000 loan. As condition for receiving the loan, the borrowing firm agrees to keep an amount equal to 10% of the loan that is $10,000 on deposit in a checking account of the lending bank until the entire loan is repaid. The $10,000 is called the compensating balance. Normal transaction and precautionary balances may be adequate to meet most or all of the required compensating balance [NEVEU, 1985]

4. Cash Planning

Cash planning is a technique to plan and control the use of cash. It protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. The forecast may be based on the present operations or the anticipated future operations.

Cash planning may be done on daily, weekly, monthly basis. The period and frequency of cash planning generally depends upon the size of the firm and philosophy of management. Large firms prepare daily and weekly forecast. Medium size firms may usually prepare weekly and monthly forecasts. Small size firms may not prepare formal cash forecasts because of the non-availability of information and small- scale types of operations. [Pandey, 1999]

2.4.1. Cash Forecasting and Budgeting

Cash budget is the most significant device to plan and control of day to day cash balances. Cash budget is a summery statement of the firms expected cash inflows and outflows over a projected time period.

Cash forecast are needed to prepare cash budgets. Cash forecasting may be done on short-term or long-term basis. Generally, forecasts covers periods of one year or less are considered as short-term; those extending beyond one year considered as long term. [FTC FOULKS LYNCH, 2006]

1. Short-Term Cash Forecasts

It is comparatively easily to make short-term forecasts. The important functions of short-term cash forecasts are • To determine operating cash requirements
• To anticipate short term financing
• To manage investment of surplus cash

The short term forecasts helps in determining the cash requirements for a predetermined period to run a business. If the cash requirements are not determined, it would not be possible for the management to know how much cash balance is to be kept in hand, to what extent bank financing be depending upon and whether surplus funds would be available to invest in marketable securities.

One of the significant roles of the short-term forecast is to pin point when the money will be needed when it can be repaid. With such forecasts in hand, it will not be different for the financial manger to negotiate short-term financing arrangements with financial institutions.

The other function of the short-term cash forecasts is to help in managing the investment of surplus cash in marketable securities. A carefully and skillfully designed cash forecasts helps a firm to: • select securities with appropriate maturities and reasonable risk • Avoid over and under investing

• Maximize profits by investing idle money [Pandey, 1999].

Short-Term Cash Forecasting Methods

The two most commonly used methods of sort term cash forecasting are: • The receipt and disbursement method
• The adjusted net income method

Receipts and Disbursement Method

Cash flows in and out process in most companies is a continuous basis. The prime aim of receipts and disbursement forecasts is to summarize these flows during a predetermined period. In case of those companies where each item of income and expense involves flow of cash, this method is favored to keep a close control over cash.

Three broad sources of cash inflows can be identified
1. Operating
2. Non-operating
3. Financial

Operating- cash sales and collection from customers is the most important part of operating cash inflows. Developing sales forecast is the first step in preparing cash forecast. All precautions should be taken to forecast sales as accurately as possible. In case of cash sales, cash is received at the time of sales. On the other hand cash is released after some time if sale is on credit. The time is realizing cash on credit sales depends up on the firms credit policy reflected in the average collection period.

Non-Operating- cash inflows include sales of old assets and dividend interest income. The magnitudes of these items are generally small. When internally generated cash flows are not sufficient, the firm resorts to external financial resources. This constitutes financial cash inflows. [Pandey, 1999]

The next step in the preparation of cash budget is estimate of cash out flows. Cash out flows include: 1. Operating out flow: – Cash purchases, payment of payables, advances to suppliers, wages and salaries and other operating expenses. 2. Capital expenditure: – it is relatively easy to predict the expenses of the firm over short-run. Firms usually prepare this budget, therefore, capital expenditure are predictable for the purpose of cash budget. 3. Contractual payments: – repayment of loan and interest and tax payments. 4. Discretionary payments:- ordinary and preference dividend [pandey, 1999]

Adjusted Net Income Method

This method of cash forecasting involves the tracing of working capital flows. It is some times called the sources and uses approach.

Two objectives of adjusted net income approaches are:
1. To project company’s need for cash at further date
2. To show whether the company can generate the required funds internally, and if not, how much will have to be borrowed or raised in the capital market.

In preparing adjusted net income forecasts item such as net income, depreciation, taxes, dividends, etc can easily be determined from the company’s annual operating budget.

The benefits of the adjusted net income method are:
• It highlights the movements in the working capital items, and thus helps to keep a control on a firm’s working capital. • It helps in anticipating a firm’s financial requirement.

The major limitation of this method is:
• It fails to trace cash flows, and therefore, it’s utility in controlling daily cash operations is limited. [Pandey, 1999)

2. Long-Term Cash Forecasting

Long –term cash forecasts are prepared to give an idea of the company’s financial requirements in distant future. They are not as the short-term forecasts. Once a company has developed a long-term cash forecasts, it can be used to evaluate the impact of new product development or plant acquisition on the firm’s financial condition three, five or more years in the future.

The major use of the long-term cash forecasts are:
• It indicates as company’s future financial needs, especially for its working capital requirements. • It helps to evaluate proposed capital projects. It pin points the cash required to finance these projects as well as the cash to be generated by the company to support them. • It helps to improve cooperative planning. Long-term cash forecasts compel each division to plan for future and to formulate projects carefully.

Long-term cash forecasts may be made for two, three, or five years. As with the short-term forecasts; company’s practice may differ on the duration of long-term forecasts to suit their particular needs. Long-term cash forecasting reflects the impact of growth, expansion or acquisitions; it also indicates financing problems arising form these developments. [Pandey, 1999].

2.4.2. Objectives of Cash Budget

The objectives of cash budgets are as follows:
• To integrate and appraise the effect of operating budgets on the firm’s cash resources. • To anticipate cash shortages and surpluses, and to allow time to plan how to deal with them. • To provide a basis for comparison with actual, to identify unplanned occurrences.

A cash budget is essential for control of day-to day cash balances and to allow efficient forward planning of the options for dealing with short-term deficits and surpluses. [FTC FOULKS LYNCH, 2006]

3. Period Coverage of Cash Budget

The period covered by the budget and the frequency with which it is revised will depend on the purpose for which it is made.

A cash budget may be long-term or short-term, or it may be made in connection with a particular contract or project. • A long-term cash budget will be made in connection with the long-term corporate plan, typically covering a period of three to five years. In some companies, however, the time horizon of budgeting may be less than a year, while in others [Particularly those concerned with exploitation of natural resources] budget periods in excess of five years may be necessary. • A short-term cash budget relates to current operations. In a business which by choice or necessity gives very detailed attention to cash management, the shortest-term budget may be prepared daily or weekly and may cover perhaps one week or one month or more ahead. • A project cash budget may be prepared in connection with a project or contract which is part of the business operations , but which needs to be assessed separately form the point of view of the cash resources it requires and its ability to pay for the use of those resources. Particular examples of this requirement are capital expenditure projects, research and development programs and special marketing campaigns. [FTC FOULKS LYNCH, 2006]

2.4.4. Relationships of Cash Forecasts and Cash Budget

The cash budget reflects the impact on cash resources of budgeted sales, costs and changes in asset structure, and is also confirmation that plans are financially viable.

It is important to distinguish between a budget and a forecast. • Cash forecast is an estimate of cash receipts and payments for a future period under existing conditions before taking account of possible actions to modify cash flows, raise new capital, or invest surplus funds. • Cash budget is a commitment to a plan for cash receipts and payments for a future period after taking any action necessary to bring the preliminary cash forecast into conformity with the overall plan of the business. It is an integral part of the master budget of the business and confirms that plans are financially viable. [FTC FOULKS LYNCH, 2006]

2.5. Investing Idle Cash

The primary function of a bank is to act as a depository for its customers’ funds and to meet the credit need of its service area. But deposit flow and low demands are subject to a high degree of uncertainty with respect to their direction, magnitude, and timing. A commercial bank must have a back up sources of liquidity to cope with these uncertainty flows. It is to meet its legal and social responsibilities as a depository and a lender.

Investing idle cash has two primary functions. The first function is that it is a major contributor to earnings. The second function of investing idle cash is to provide the bank with liquidity to meet expected or unexpected cash needs. Because the minimum investment required purchasing money market instrument is generally very large, the market is dominant by commercial banks, states and local governments, financial and non financial institutions and more recently mutual funds. These large investors purchase money market instruments to convert temporary cash surpluses into highly liquid interest bearing investments. [Brick, 1984]

2.5.1. Objectives of Investing Idle Cash

The objectives can be categories as follows:
• Liquidity: the cash must be available for use when needed. • Safety: no risk of loss must be taken.
• Profitability: subject to the above, the aim is to earn the highest possible after tax returns. [FTC FOULKS LYNCH, 2006]

2. The Principal Money Market Instruments

• Treasury bills
• Negotiable certificates of deposit
• Commercial paper
• Bankers agreement
• Repurchase Agreements [BRICK, 1994]

1. Treasury Bills

These are the most frequency issued marketable securities. They are sold weekly or monthly on an auction basis and have maximum maturity of one year. A treasury bills does not carry an interest coupon; its interest return is the difference between the price paid at auction and that received when sold or received at maturity. Although these securities do not offer the highest yield among the short-term debt instruments, they are “Liquid” because they can quickly converted into cash with out undue risk of capital loss.

2. Negotiable Certificate of Deposit

In essence of a negotiable certificate of deposit is a receipt issued by a bank or savings and loan association in exchange for a deposited or funds. The bank agrees to pay the amount deposited, plus interest, to the bearer of the receipt on the date specified on the certificate.

3. Commercial Paper

When a well-known corporation with a good credit rating wishes to borrow money for a short period of time, it issues a promissory not called commercial paper.

4. Banker’s Acceptances

Drafts that a customer has drawn on a bank and which bears the banks promise to pay them at maturity are called bakers’ acceptances. The acceptance reflects the obligation of both the bank and the drawer to pay the face amount.

5. Repurchase Agreements

A repurchase agreement is a contract in money market instrument. A borrower who needs funds for a few days enters into a contract to sell securities. Usually treasury bills form his inventory and agrees to purchase them back later at a given price. Often the price stated simply as that amount necessary to provide a certain yield basis to the buyer for the time involved. [Brick 1984]

2.6. Managing Cash Receipts and Payments

2.6.1. Imprest System of Cash Funds

Immediate cash payments and payments that are too small to be made by check may be made from a petty cash fund. Under the imprest system the petty cash fund is created by drawing a cheque to petty cash for the amount of the fund. In recording the establishment of the fund, petty cash fund is charged and cash is credited. The cash is then turned over to the cashier or some person who is to be responsible for payment made out of the fund.

The petty cash operations should be maintained a part from other cash funds employed for a particular business purpose. Methods other than the imprest system are some times employed in handling petty cash. The imprest system may be employed not only for petty cash but also for other cash funds in large organizations. [Simons and Karrenbrock, 1964].

2.6.2. Cash Change Fund

Retail stores and other businesses that receive cash directly from customers must maintain a fund of currency and coins in order to make change. Drawing a cheque for the required amount, debiting the account cash on hand and crediting cash on bank may establish the fund. At the end of each business day, the total amount of cash received during the day is deposited and the original amount of the change fund is retained. [Fess Warren]

2.6.3. Cash Gap

It is a simple concept that helps operating people understands how their actions affect a company’s cash flow. Although a desirable cash gap varies with the economic sector, geography and season, the concept can be used to improve cash management at any company, no matter how the industry is. Tradition and the nature of business often set the typical cash gap in a given industry. Some industries are inherently higher cash gaps than other.

Some of the ways to reduce the cash gap are:
• Increase the payable period and
• Decrease the collection period [Hampton, 1989]

2.7. Statements of the Cash Flows

The statement of the cash flows explains how a company’s obtained and used cash during some period. The sources of cash are known as cash inflows, and the users are called cash outflows. The statement classifies cash receipt [i.e. inflows] and payments [i.e. outflows) in to three categories: • Operating activities

• Investing activates
• Financing activities

The following section defines these activities and out lines the types of cash flows that are normally classified under each category. [Edmonds,Etal, 2000]

2.7.1. Operating Activities

Operating activates include cash inflows and outflows generated by running [i.e. operating] the business. Some of the specific items that are shown under this section are as follows:

• Cash receipts from sales, commissions, fees and receipts form interest and dividend. • Cash payment for inventories, salaries, operating expenses, interest and taxes. Gains and losses are not included in this section. The total cash collected from the sale of assets is included in the investing activities section.

2.7.2. Investing Activities

Investing activates include cash flows that are generated through a company’s purchase or sale of long-term operational assets, investment in other company’s and its lending activities. Some item included in this section are as follows: • Cash receipt from the sale of property, plant, and equipment or of marketable securities as well as the collection of loans. • Cash payment from the purchase of property, plant, and equipment or of marketable securities as well as loans made to others.

Determining cash flows from investing activities may also require an analysis of changes in the beginning and ending account balances income statement data.

2.7.3. Financing Activities

Financing activities include cash inflows and outflows associated with the company’s own quality transaction or it borrowing activities. The following are some times appearing under the financing activities: 1. Cash receipts from the issued of stock and borrowed funds. 2. Cash payments for the purchase of treasury stock, repayment of debt, and payment of dividends. 3. Cash receipts and payments from short-term investments

Cash flow from financing activities can frequently be determined by simply analyzing the change in the balances of liability and stockholder’s equity accounts. [Edmonds, Etal, 2000].

2.7.3.1. Short Term Investments

Short –term investment opportunities present themselves when cash surpluses arise. Companies may hold cash not only for transaction motives, but also for precautionary and speculative motives. Transactions motive: The need to hold cash to meet day-to-day operational requirements. Precautionary motive: The holding of buffer stocks of cash to cover unexpected business requirements. Speculative motive: cash may be held to exploit unanticipated business or investment opportunities. The company’s attitude to risk and working capital management will determine the planned cash holdings. • Firms with an aggressive working capital policy will plan to minimize funds held, and borrow whenever cash is needed. • Firms with a defensive policy will set aside cash in a investment portfolio, which can be drawn upon when the need arises. Surplus cash: – comprises liquid balances held by a business which are neither needed to finance current business operations nor held permanently for short-term investment. [FTC FOULKS LYNCH, 2006]

2.7.3.2. Borrowing

Interest rates on bank loans and overdrafts are normally variable, i.e. they alter in line with base rates. Fixed rate loans are available, but are less popular with firms. [FTC FOULKS LYNCH, 2006]

Bank overdrafts

A common source of short-term financing for many businesses is a bank overdraft. These are mainly provided by the clearing banks and represent permission by the bank to write cheques even though the firm has insufficient funds deposited in the account to meet the cheques.

An overdraft limit will be placed on this facility, but provided the limit is not exceeded, the firm is free to make as much or as little use of the overdraft as it desires.

The advantages of overdrafts are the following:
• Flexibility- they can be used as required.
• Cheapness- interest is usually small and a loan interest is a tax deductible expense.

The disadvantages of overdrafts are as follows:
• Overdrafts are legally repayable on demand. Normally, however, the bank will give customers assurances that they can rely on the facility for a certain time period. • Security is usually required by way of fixed or floating charges on assets or sometimes, in private companies and partnerships, by personal guarantees from owners. • Interest costs vary with bank base rates.

Overall bank overdrafts are one of the most important sources for short-term finance for industry.

Bank Loans

A bank loan represents a formal agreement between the bank and the borrower, that the bank will lend a specific sum for a specific period. Interest must be paid on the whole of this sum for the duration of the loan.

The source is, therefore, liable to be more expensive than the overdraft and is less flexible but, on the other hand, there is no danger that the source will be with drawn before the expiry of the loan period. Interest rates and requirements for security will be similar to overdraft lending. [FTC FOULKS LYNCH, 2006]

2.8. Internal Control over Cash

Good and desirable internal control measures that ideally may be considered to segregate duties and function are:- • Handling or sales transaction
• Cash receiving and keeping.
• Cash mail receiving.
• Depositing of cash.
• Comparison of cash receipts and deposits.
• General ledger entries and records [summery control records, sales, accounts receivable).
• Preparation of bank reconciliation.
• Custody of petty cash fund.
• Handling of purchase transaction
• Payment voucher preparation.
• Check preparation.
• Check signing and issuing.
• Check custody.
• Vouchers register [entries].
• Advances payments –purchase and travel and other advances.
• Budgeting.
• Payroll.
• Inventory control [Storing and issuing].
• Pre-numbered forms like cash receipt, checks, vouchers and other receipts.

2.8.1. Review of Internal Control

• All sources of cash receipts [sources of income] are properly established, identified and authorized at point of operations, which includes examining sales processes. • All cash received and documented includes assuring property of forms and mathematical accuracy. • All cash received are handled under strict protective custody, which includes physical protections, daily depositing of cash receipts in fact to a bank or central cashier and cashier integrity. • All supporting records and evidences of cash received are independently corporate and maintained. [Yohannes Kinfu, 1966].

2.8.2. Objectives of Cash Audit

1. Establish available cash that is to be there.
2. Prove the cash that ought to be there.
3. Prove whether the cash on hand is needed or not.
4. Check independent accountability for cash transactions.
5. Prove disbursement authorization.
6. Prove handling of receipt.
7. Prove cash protection.
8. Establish management reporting methods and timely monitoring.

2.9. The Financial Statement Analysis Methods

The ratios that are applied for analysis of primary financial statements are:
• Liquidity Ratio
• Cash Ratio
• Working Capital
• Solvency Ratio
• Current Cash Debt Coverage Ratio
• Cash Debt Coverage Ratio

2.9.1. Liquidity Ratio

Its ability to pay obligations that are expected to become due to with in the next year’s operating cycle. It needs to look very closely at the relationship so its current assets to current liability.

2.9.2. Cash Ratio

It indicates conservatism of liquidity such as when a company pledged its receivable and its inventory; or the annalists suspects a sever liquidity problem with inventory and receivable. It is calculated on cash & cash equivalent plus marketable securities divided by current liability.

2.9.3. Working Capital

One measure of liquidity is working capital, which is the excess of current assets over current liabilities. When working capital is positive, there is greater likely hood that the company will pay its liabilities. When the reverse is true, short term creditors may not be paid, and the company may ultimately be forced into bankruptcy.

2.9.4. Solvency

Its ability to pay interest as it comes due and to repay the face value of the debt at maturity. Solvency ratios measure the ability of enterprise to survive over a long period of time. The debt to total asset ratio is one source of information about paying ability.

2.9.5. Current Cash Debt Coverage Ratio

Cash provided by the operating activities divided by average current liabilities. Because cash provided by operating activities involves the entire year rather than a balance at one point in time is often considered a better representation of liquidity on the average day. Current Cash Debt Coverage= Cash Provided by Operation Average Current Liabilities

It is due to decide the company’s power to generate sufficient cash provided by operating activities to meet its current obligations. [Bringham, 1995].

2.9.6. Cash Debt Coverage Ratio

It is the ratio of cash provided by operating activities to total debt as represented by average total liabilities. This ratio indicates a company’s ability to pay its liability from cash generated form operations.

Cash Debt Coverage Ratio= Cash Provided by Operation
Average total Liabilities

2.10. Cash Management Models

A number of different models have been developed for managing cash balances, in particular those developed by Baumol and by Miller-Orr.

All models assume that a business will have a certain amount of ready cash available, in a bank current account, for day-to-day transactions. In addition, an amount of buffer funds will be invested in deposit accounts, marketable securities, etc and these can be used to top up the current account, or absorb short-term surpluses from it, as appropriate.

The points addressed by the models are as follows:
• At what point should cash move between the current account and the buffer funds? • How much cash should be moved?

There are conflicting costs.
• Each time cash is moved in or out of the buffer funds, transaction costs will be incurred-these are often fixed. • Any cash held within the current account has an opportunity cost associated with it, represented by the difference between the interest earned in the current account (if any) and that earned in the buffer funds.

Cash managements models attempt to minimize the total costs associated with cash movements between a current account and short-term investments-the “Opportunity” cost of lost interest plus transaction costs- by determining when, and how much, Cash should be transferred each time.[ FTC FOULKS LYNCH, 2006]

2.10.1. Baumol Cash Management Models

The mechanics of this model are very similar to those of the EOQ model. If a company’s cash resources are steadily used up by a constant daily demand for cash, Baumol suggested that the EOQ stock model could be applied to the situation so that the optimum regular cash injection, X, into the current account can be calculated.

x=

Where x = the optimum regular cash injection into the current account. [FTC FOULKS LYNCH, 2006]

2.10.2. Miller –Orr model

Controls irregular movements of cash by the use of upper and lower limits on cash balances.

The lower limit has to be specified by the firm and the upper limit is calculated by the model. If the cash balance on any day goes outside these limits action must be taken.

• At point 1 the cash balance reaches the lower limit and must be replenished in some way, e.g. by the sale of marketable securities or withdrawal from a deposit account. • At point 2 the cash balance reaches the upper limit and an amount must be invested in marketable securities or place in a deposit account. Again, this is calculated by the model as the distance between the upper limit and the return point.

The minimum cost upper limit is calculated by reference to brokerage costs, holding costs and the variance of cash flows. The model has some fairly restrictive assumptions. [FTC FOULKS LYNCH, 2006]

To sum up the literature review, the application of cash management is very much useful for the whole company particularly for banks. The responsibilities of management with respect to cash are: • To ensure that there is sufficient cash to carry on operations. • To invest any idle cash and to prevent loss of cash due to theft or misappropriate.

Therefore, like any other businesses organization cash management is useful in United Bank S.Co. So as to forecast their cash efficient budget allocation and to mobilize the idle cash of the United Bank S.Co., it is useful to ensure that there is sufficient cash to undertake their activities appropriately.

CHAPTER THREE

DATA PRESENTATION AND ANALYSIS

3.1. Organizational Profile

3.1.1. Historical Background of Dashen Bank

The bank is a privately owned company established in 1995 in accordance with the “Licensing and supervision of banking business proclamation no.84/1994” of Ethiopia to undertake commercial banking activities. Dashen bank came in to existence with an authorized and subscribed capital of birr 50millon.The first founder members were 11 business men and professional that agreed to combine their financial resources and expertise. Presently its capital and asset reached to 279 million and 4.1 billion respectively. And the number of share holders has reached to 75 as of October 31, 2005.

In January 1996, the bank started operation with 10 branches at the same time. Now it has reached 39 area banks and 4 Forex Bureaus. The area bank and networking is designed to facilitate the business interactions of their clients. Accordingly, 21 of the area banks are here in Addis Ababa and the rest 18 area banks are situated in up country major towns.

3.1.2. Objectives of Dashen Bank

The objective or business purpose of the bank is to render commercial banking activities both at the domestic and international spheres.

The following constitute its business purpose:
• To undertake banking and monetary exchange business. • Accept and mobilize various types of deposits.
• Extend loan and credit facilities practically to every economic sector. • Render banking service related to international trade. • Handle money transfers domestically and internationally. • Opening bank branches with in and outside Ethiopia and • Engaging in other activities related to banking and finance.

3.1.3. Dashen Bank’s Vision and Mission.

3.1.3.1. Vision of Dashen Bank

“In as much as mount Dashen excels all other mountains in Ethiopia, Dashen
Bank will continue to prove unparalleled in banking services”.

3.1.3.2. Mission of Dashen Bank

“Provide efficient and customer focused domestic and international banking service, overcoming the continuous challenges for excellence through the application of appropriate technology”.

3.1.4. The Values of Dashen Bank

• Integrity and accountability
• Confidentiality
• Sustainable growth and stability
• Customer satisfaction
• Satisfied employees
• Developed banking habit in the community
• Attended customers constructive out look
• Assisted continuous growth of customers
• Open for community access

3.1.5. Area banks [Branches] of the Bank

Dashen Bank S.Co. has 39 branches both in Addis and out of Addis with in the territory of the country Ethiopia. The branchs of Dashen Bank in Addis are: Main, Africa Andinet, Bole, Gola, Kaliti, Kera, Kolfe, Lideta, Messalemia, Tana, Yererber, Piazza, Megenagna, Gullele, Sebategna, Gurdsholla, Saris, Leghar, Abakoran, Goffa, Tikuranbessa and branches in up-country are: Adigrat, Awassa, Bahirdar, Dessie, Djibruck, Dilla, Diredawa, Dukem, Gonder, Harrer, Jimma, Kombolcha, Mekelle, Nazareth, Shashemene, Woldia, Zway, and Wolaytasedo.

3.1.6. Stakehoders of Dashen Bank

Stakeholders of Dashen Bank’s are:
• Owners [share holders]
• Customers
• Competitors
• The public as whole
• Individuals [employees]

3.1.7. Organizational Structure of Dashen Bank

Dashen bank like other organization has a Board of Directors with seven in number. The president is under the Board of Directors. There are three supporting divisions each are responsible directly to the president, namely Senior Risk Management Advisor, Corporate Planning and Development, and Controller. The organization has also eight departments headed by two vice presidents, i.e. under the Vice President of System and Resources Management: – have Information Technology, Engineering & Building Administration, Fund management & Accounts, and Human resources & Logistics. Under Vice President of Operation Management: – have International Banking, Credit, Promotion & Customer Relations Service and Legal department.

3.2. Cash Management Analysis

3.2.1. Cash Components of Dashen Bank

The cash balance of the bank includes:-
• Cash Local Currency
• Cash Foreign Currency

3.2.1.1. Cash Local Currency

Cash local currency is held in to two forms that are petty cash and vault cash. Petty cash-cash kept separately for day-to-day operational use. It is every-day parlance implies a relatively small amount of money kept to defray expenses and is normally a fixed amount. And it is also called “Teller Cash”. Vault cash may consist of birr notes and coins. A branch’s excess cash kept in strong room to be drawn upon whenever cash in the daily operation till runs low. This is kept under control at all times.

3.2.1.2. Cash Foreign Currency

It includes cash, notes of various foreign currencies and coin in some cases. The balance shown in this account is the counter value of the foreign currency cash holding in birr.

As cash being one of the most liquid assets the analysis of cash is going to be analyzed by calculating its percentage share from current asset.

Table 3.1
Trends of cash (In’000 Birr)
|Items |2001/02 |2002/03 |2003/04 |2004/05 |2005/06 | |Cash on hand |57,653 |102,797 |77,215 |109,768 |119,535 | |Current assets |1,463,934 |1,965,557 |2,637,347 |3,374,017 |4,486,000 | |Shares from current asset |3.94% |5.25% |2.93% |3.25% |2.66% |

Source: Annual report of the company

As displayed in the table above, the cash on hand balance of Dashen Bank accounted for 3.94 %, 5.25%, 2.93%, 3.25 % and 2.66% from the total current assets for five consecutive years. The trend shows significant variation from year to year; especially in 2002/03 year revealed that there is a greater share of cash on hand form the current asset. It seems to indicate that the bank holds idle cash that reduces its future profit.

3.2.2. Deposits

The company has a separate general ledger accounts in each bank that reflects the balance of the bank’s current [reserve] accounts i.e. national bank of Ethiopia [NBE], other commercial banks of Ethiopia and foreign bank account.

All payments, receipts, borrowings and repayments that takes place between the bank and the national bank cleared against NBE account. Incline with NBE’s reserve requirement a minimum balance of 5% of the banks current liabilities should also be kept in this account at all times. A deficiency in the required reserve balance is subject to penalty. The penalty shall be assessed at the rate twice the current average rate of interest fixed on loans and advances.

The amounts of cash deposited in the other domestic banks are also reflected by its own accounts. The foreign banks general account balance shows the amount of foreign currency deposited in foreign banks and shown the counter value in birr.

Table 3.2
Trends of deposits (in ‘000 birr)
|Items |2001/02 |2002/03 |2003/04 |2004/05 |2005/06 | |Deposit with local banks |27,652 |34,175 |80,540 |75,207 |1,374 | |Deposit with foreign banks |191,928 |245,141 |190,113 |419,626 |546,014 | |Reserve account With NBE |101,233 |138,292 |224,472 |415,648 |482,049 | |Total deposits |229,704 |417,610 |495,125 |910,483 |1,029,438 | |Share from current asset |15.69% |21.25% |18.77% |26.99% |22.95% |

Source: Statement of deposit prepared by bank

As the table shows above, the deposit balance of the bank is current account that facilitates its transactions with different banks. The trend of deposit showed a different percentage share through out the years. That is it has declined from year 2002/03 to year 2003/04.

3.2.3. Cash Budget

From Dashen bank point of view the company only forecasts the deposit amount that will be available in the bank for future periods and loans & advances that will be lent for individuals and business firms.

When the bank prepares the projected deposits and loans and advances the considerations that are taken in to account are: • The political situations of the country
• The economic conditions of the country
• The competitors economic position and
• Previous years trend of the bank.

3.2.4. Investing Idle Cash

One of the basic principles of cash management is investing the cash, which remains idle. Cash on hand earns nothing but when cash is invested there is a return on it. An important part of the treasury’s job is to ensure that any excess cash is invested.

To avoid a cash crisis, however, it is very essential than this investment be highly liquid and risk free. A liquid investment is one with the market in which some one is willing to buy or sell the investment. A risk free investment is the one there is no concern that the party will default on its promise to pay its principal and interest.

Table 3.3
Trends of investment (in ‘000 birr)
|Items |2001/02 |2002/03 |2003/04 |2004/05 |2005/06 | |Investment
|21,347 |22,801 |25,551 |27,801 |27,801 | |Treasury bills & Gov’t | | | | | | |bonds |139,954 |129,445 |299,039 |- |- |

Source: Documented report in the bank

It is the capital investment in acquisition of stocks from Nyala Insurance S.Co.and invests in Tana Building jointly with Medroc Ethiopia PLC. And also the bank tries to invest cash in different investment alternatives such as in treasury bills, certificates of deposit and in commercial papers. As table 3.3. shows growth in investment but for two consecutive years i.e. 2004/05 and 2005/06 the investment keep constant and also investment for treasury bills are not made .

3.2.5. Controlling Cash Receipts and Payment

Just as cash is the beginning of operating cycle, it is often the starting point of the company’s system of internal control. Cash is the mere asset that is readily convertible in to any other type of asset, it is easily concealed and transported and it is highly desired. Due to these natures, cash is the asset most susceptible to importer diversion and is Further more, numerous volumes of cash transactions various defects may occur in executing and recording cash transactions use.

3.2.5.1. Controlling Cash Receipts

Applications of internal control to cash receipts are:
• Establishment of responsibility
• Segregation of duties
• Documentation procedures
• Physical, mechanical, and electronic controls
• Independent internal verification and
• Other controls

Establishment of Responsibility: – Only designated cashiers are authorized to handle cash receipts and there is limited access to cash in safe and bank vaults. The chief cashier also controls the teller-who is responsible for balancing cash with documents.

Segregation of Duties: – Different individuals receive cash and deposit or hold the cash. Receiving deposits and recording is a responsibility of Receiving Teller and he/she will hand the balancing amount to the chief cashier and source of documents will be in custody of Accountant or Assistant Manager for authorization.

Documentation Procedures: – Cash register tapes and deposit slips are used in the documentation procedure. Checking whether the deposit slips are properly filled or not is also the responsibility of tellers.

Physical, Mechanical, and Electronic Controls: – The control mechanism of the company is mostly post auditing. The authorizer checks the document after the teller receives the money and document. The electronic control system used in Dashen Bank is the banking system called I-FLEX CUBE 5.5 VERSION which has strong control mechanism.

Independent Internal Verification and Other Controls: – The internal auditor also tries to control by checking the documents every day’s transaction and by using surprise counting of money at least once in a month.

3.2.5.2. Control Over Cash Payments.

Vault cash

Cash is paid for several reasons, such as to pay expenses and liabilities or to purchase assets. The paying teller is only responsible for making payments and required to check that the signature on the cheques is verified and that the amount written in words and figures agree, and the instrument bears the proper endorsement. If the cheques involving big amount the Accountant or Assistant manager sees at a glance whether bear signature verified, proper endorsement and amount they will sign on it in order to be paid. The cash cheques and withdrawal vouchers are compared with the total amount of money submitted by the paying teller. Cash on hand at the end of the day plus payments for the withdrawals must agree with the total amounts of cash withdrawn from the chief cashier. The chief cashier checks the correctness and balancing of the cash by verifying the cash pocket and bricks and counting the lose notes.

Imp rest Cash Fund

The operation of the petty fund involves establishing the fund, making payment from the fund and replenishing the fund. In Dashen Bank always maintained the petty cash fund in the hand of the Secretary. In most branches petty cash amount is constant i.e.Br.200 it replenished any time, but it must be replenished at the end of every month.

The amount that is going to be financed from this fund is small amounts with out restriction. The document it involves is loading and unloading costs, purchasing small items that are so urgent, transportation cost, entertainment expenses …etc.

Change Fund

A change fund is used to facilitate the collection of cash form the customers. The teller for exchange will receive from the chief cashier a fixed amount of cash [notes and coins] in different denominations against signature in a bound book. If additional amounts are needed for exchange, the chief cashier should provide the cash against signature. Exchange from small to big notes is completely prohibited. At the end of the day the exchange teller will close his window to the public and after balancing his cash will surrender this cash to the chief cashier in notes and coins but obviously it must same amount that was received by him during the day.

Cash Gap

The bank has a cash holding limits in accordance with the needs of the cash requirements of branches [i.e. based on their operation). When an out laying branch carries cash beyond the limit it is permitted to do so and desires to send away the portion in excess or when its cash supply seeks to replenish it or when it anticipates seasonal large withdrawals of cash form the bank by its customers and prepares before hand to hold sufficient supply of cash to meet this demand, it ought to call to the branch of supplying or receiving the cash informing the quantity and the denomination of the cash that is either to be sent away or to be received and the date the cash is to be consigned to or from.

The branches whose holding of cash exceeded its limits or who has deteriorated cash notes or cash of a certain denomination which is not mostly required in that area that time and seeks to dispatch to the branch holding should first inform by writing domination of the cash and the date when it is anticipated to be moved by the copy to accounts department of head office to arrange the insurance coverage.

3.2.6. Total Assets and Total Liability Management

The total assets of Dashen Bank include
• Cash on hand
• Deposit in banks
• Reserve accounts
• Collections
• Loans and advances to customers
• Other assets
• Investment
• Intangible and tangible fixed asset

The liabilities of Dashen Bank include:
• Customer deposit
• Checking accounts
• Saving accounts
• Certificate of deposits
• Other liabilities and
• Provision for taxation

3.2.6.1. Sources and Uses of Fund

The study here focuses on the short-term sources and uses of funds. Statements about the flexibility, cost and risk of short term versus long-term debt depend, to large extent, on the type of short –term credit that is actually used.

The shot-term uses of the bank are:
• Cash on hand
• Deposit with local banks
• Deposit with foreign banks
• Reserve account with NBE
• Items in the course of collection form other banks
• Deposits, prepayment
• Loans and advances to customers and
• Other assets

The short-term sources of the bank include:
• Customer deposit
• Other liabilities
• Margins on letters of credit
• Provision for taxation, and
• Capital and reserves.

3.2.6.2. Changes in Sources and Uses of Funds

There have been sharp changes in recent years in the sources and uses of funds at banks that reflect substantial changes in the functions performed increasing competition form other financial institutions. The research analyzes the changes in sources and uses of funds of Dashen Bank by using trend analysis of five years.