0cash management

8/23/2019 0Cash Management

1/23

CASH CONTROL, CASH MANAGEMENT, CASH

BUDGET, CASH PLANNING

Cash planning is the absolute backboneof the company

Cash control is fundamental to the

success of any business but isparticularly important in the financialservices sector

For an on-going business, the primaryobjective in cash management is toensure that the necessary day-to-daytransactions can be performed.


2/23

CASH CONTROL;

An essential part of cash management istherefore, the cash flow forecast,

Planning for surplus cash and for cash shortage

In the form of Cash Receipts all items the firms receives cash

inflows like premium, investment income, fundsraising etc.

Payments forecast claims and other policy holderbenefits, administrative expenses, dividend paid,loans paid, tax paid etc.


3/23

GENERAL FORMAT OF THE CASH BUDGET

Jan Feb Nov Dec

Cash receipt

Less: cash disbursement

Net cash flow

Add: beginning cash

Ending cash

Less: minimum cash balance

Required total financing

Excess cash balance


4/23

PROJECTED CASH RECEIPTS

Forecast/due

premium

Cash Premium

Collection o/s

*Lagged one monthLagged two month

**Other cash receipts

Total cash receipts

* Represents premium due in the preceding month and collected in the current month,

Maybe a percentage of the premium

** Sources other then premium


5/23

PROJECTED CASH DISBURSEMENTS

Payment to

P. holder

January Feb Nov Dec

Admin

payment

Other

payments

Fixed asset

outlay

Dividend

payment

Total

disburseme

nt


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PREPARATION OF FORECAST;

UNSATISFACTORY CASH FLOWS

If the forecast shows an unsatisfactory cashflow, modification may be effected by

amending the timing or the amount of the

individual items within the forecast.


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In preparing the forecast, the personresponsible will seek information from all

managers who may be involved in receiving

monies or authorizing expenditure.


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For an insurance company this mayinvolve

Underwriting and claims departments

Investment & property department Development costs

Secretarial department

Accounts department Marketing department

Personnel department


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The form of statement produced will reflect

all the sources of income and expenditure,

forecast over varying time periods the

shorter the period the greater the anticipated

accuracy.


10/23

CASH BUDGETING

ILLUSTRATIION


11/23

Prepare a cash budget for the three months

ended 30th September 2002 of STAR ins co.

based on the following information:

Rs.

Cash at bank on 1st july,2002 25,000

Monthly salaries and wages (estimated) 10,000

Interest payable in August, 2002 5,000


12/23

Estimated June July August September

Rs. Rs. Rs.

Fresh prem. 1,20,000 1,40,000 1,52,000 1,21,000

Ren. Prem 1,00,000 80,000 1,40,000 1,20,000

(due)

Claims& 1,60,000 1,70,000 2,40,000 1,80,000

Commission

Other 18,000 20,000 22,000 21,000

Expenses


13/23

Renewal premium (due) are collected 50% in

the due month

50% in the month following

Collection from R.Premium are subject to

10% discount if received in the due month

and to 5% if received in the following month.


14/23

CASH FLOW STATEMENT

How the co.s cash increases and decreases during the

period

Financial position is changed between two points in time,

beginning and at the end of a month or year cash flow

explains

Cos B/S and P/L account prepare on accrual basis, so net

profit cant give the true liquidity position

Effective cash management means a proper balancing

between liquidity and profitability

Statement shows sources of cash inflow and uses of cash

outflows of a firm

Statement reports cash receipts and payments classified

as operating, investing and financing activities


15/23

Format that reconciles the beginning andending cash balances. It reports from wherecash has come and how it has been spent

Cash is needed to conduct the operation, topay the obligation, to provide return to theirinvestors

Ability to make profit is not sufficient tosurvive but to generate cash to meetobligations


16/23

CLASSIFICATION OF CASH FLOWS

Operating activity It is the principal revenue producing activities of the

company, generally result from the events that enterinto the determination of net profit. E.g. are

Cash receipt from the sale of goods, payment to supplier Cash receipts and cash payment for premium and

claims/commission and other policy benefits

Cash payment or refund of income tax

Investing activities

Acquiring and disposal of fixed assets

Acquiring of shares and disposal of shares

Cash advances and loans made to third parties


17/23

Financing activities

Separate disclosure of financing activities isimportant for predicting claims on future cash

flow by providers of fund That result in changes on the size and

composition of the owners capital, cashproceeds from issuing share, debentures,

loans, bonds Cash repayment of amount borrowed

Payment of dividend


18/23

PREPARATION OF CASH FLOW STATEMENT

Comparative balance sheetAt the beginning and at the end of the

accounting period to indicate the amount ofchanges in assets liability and capital.

Profit and loss accountAccount of the current period enables to

determine the amount of cash provided by orused in operating activities

Additional data

Additional data is necessary to determine howcash has been provided and used


19/23

CALCULATION OF NET CASH FLOWS FROM OPERATING

ACTIVITIES

Rs Rs

Cash sales

--

Cash received from customers

Less: --

cash purchases

cash paid to supplier

cash expenses(e.g. wages, salary rent, taxes)

Net cash flow from operating activities


20/23

ILLUSTRATION- CASH FLOW

Purchases Rs. Sales Rs.cash 600,000 cash 900,000

credit 200,000 credit 100,000

Wages 100,000

Gross profit 100,000

1,000,000 1,000,000

Depr. 20,000 G. profit 100,000

Salary 50,000 Interest 20,000

Loss of sale of plant

5,000profit on sale of invest.

90,000Net profit 75,000

150,000 150,000

Calculate net cash flow from operating activities.


21/23

CASH FLOWCash flows are inflows and outflows of cash andcash equivalents.

1. Operating Activities : Principal revenue producingactivities.

2. Investing Activities : Acquisition and disposal oflong-term assets not included in cash equivalents.

3. Financing Activities : That result in changes in the

size and composition of the owners capital.


22/23

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31ST DECEMBEER 2007

2007 2008

OPERATING CASH FLOWSA) UNDERWRITING ACTIVITIES

PREMIUMS RECEIVED

REINSURANCE PREMIUMS PAID

CLAIMS PAID

COMMISSIONS PAID

COMMISSIONS RECEIVED

MANAGEMENT EXPENSES PAID

NET CASH FLOW FROM UNDERITING ACTIVITIES

B) OTHER OPERATING ACTIVITIES

INCOME TAX PAID

OTHER OPERATING PAYMENTS

OTHER OPERATING RECEIPTS

LOANS ADVANCED

LOAN REPAYMENTS RECEIVED

NET CASH FLOW FROM OTHER OPERATING ACTIVITIES

INVESTMENT ACTIVITIESFINANCING ACTIVITIESNET CASH INFLOW/(OUTFLOW) FROM ALL ACTIVITIESCASH AT THE BEGINNING OF THE YEARCASH AT THE END OF THE YEAR


23/23

ILLUSTRATION CASH FLOWStar Insurance Co. Ltd., has furnished the following information for preparation of

their operating cash flow statement.Rs.

Premium received 8,52,000Claims admitted but not paid 42,000Commission paid 50,000Commission on reinsurance accepted 16,000Claims recovered from reinsurer 50,000Survey fees claim 10,000Commission on reinsurance ceded 12,000Expenses of management related to insurance 78,000Claims paid 65,000Reserve for unearned as on 01-01-2007 2,30,000

Claims outstanding as on 01-01-2007 27,000Investment Income 18,500Admn. Expense 5,000Dividend received 18,000Dividend paid 9,000

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