CASH CONTROL, CASH MANAGEMENT, CASH BUDGET, CASH PLANNING

Cash planning is the absolute backbone of the company Cash control is fundamental to the success of any business but is particularly important in the financial services sector For an on-going business, the primary objective in cash management is to ensure that the necessary day-to-day transactions can be performed.

CASH CONTROL;
An essential part of cash management is therefore, 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, funds raising etc. Payments forecast claims and other policy holder benefits, administrative expenses, dividend paid, loans paid, tax paid etc.

GENERAL FORMAT OF THE CASH BUDGET

Jan Cash receipt Less: cash disbursement Net cash flow Add: beginning cash Ending cash Less: minimum cash balance Required total financing Feb Nov Dec

Excess cash balance

PROJECTED CASH RECEIPTS

Forecast/due premium Cash Premium

Collection o/s *Lagged one month

Lagged 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

PROJECTED CASH DISBURSEMENTS

Payment to January P. holder Admin payment Other payments Feb Nov Dec

Fixed asset outlay

Dividend payment Total disburseme nt

PREPARATION OF FORECAST;

UNSATISFACTORY CASH FLOWS If the forecast shows an unsatisfactory cash flow, modification may be effected by amending the timing or the amount of the individual items within the forecast.

PREPARATION OF FORECAST;

In preparing the forecast, the person responsible will seek information from all managers who may be involved in receiving monies or authorizing expenditure.

PREPARATION OF FORECAST;
For an insurance company this may involve Underwriting and claims departments Investment & property department Development costs Secretarial department Accounts department Marketing department Personnel department

PREPARATION OF FORECAST;

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.

ILLUSTRATIION

CASH BUDGETING

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

Estimated

June Rs. 1,20,000 1,00,000 1,60,000 18,000

July

Rs.
1,40,000 80,000 1,70,000 20,000

August Rs. 1,52,000 1,40,000 2,40,000 22,000

September

Fresh prem. Ren. Prem (due) Claims& Commission Other Expenses

1,21,000 1,20,000 1,80,000 21,000

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.

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

Format that reconciles the beginning and ending cash balances. It reports from where cash has come and how it has been spent Cash is needed to conduct the operation, to pay the obligation, to provide return to their investors Ability to make profit is not sufficient to survive but to generate cash to meet obligations

CLASSIFICATION OF CASH FLOWS

Operating activity It is the principal revenue producing activities of the company, generally result from the events that enter into 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

Financing activities Separate disclosure of financing activities is important for predicting claims on future cash flow by providers of fund That result in changes on the size and composition of the owners capital, cash proceeds from issuing share, debentures, loans, bonds Cash repayment of amount borrowed Payment of dividend

PREPARATION OF CASH FLOW STATEMENT

Comparative balance sheet At the beginning and at the end of the accounting period to indicate the amount of changes in assets liability and capital. Profit and loss account Account of the current period enables to determine the amount of cash provided by or used in operating activities Additional data Additional data is necessary to determine how cash has been provided and used

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

ILLUSTRATION- CASH FLOW

Purchases cash credit Wages Gross profit Rs. 600,000 200,000 100,000 100,000 1,000,000 20,000 50,000 5,000 75,000 150,000 Sales cash credit Rs. 900,000 100,000

1,000,000 G. profit Interest

profit on sale of invest.

Depr. Salary
Loss of sale of plant

100,000 20,000 90,000 150,000

Net profit

Calculate net cash flow from operating activities.

CASH FLOW
Cash flows are inflows and outflows of cash and cash equivalents.
1.

2.
3.

Operating Activities : Principal revenue producing activities. Investing Activities : Acquisition and disposal of long-term assets not included in cash equivalents. Financing Activities : That result in changes in the size and composition of the owners capital.

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31ST DECEMBEER 2007

2007 OPERATING CASH FLOWS A) 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 ACTIVITIES FINANCING ACTIVITIES NET CASH INFLOW/(OUTFLOW) FROM ALL ACTIVITIES CASH AT THE BEGINNING OF THE YEAR CASH AT THE END OF THE YEAR

2008

ILLUSTRATION CASH FLOW

Star Insurance Co. Ltd., has furnished the following information for preparation of their operating cash flow statement. Rs. Premium received 8,52,000 Claims admitted but not paid 42,000 Commission paid 50,000 Commission on reinsurance accepted 16,000 Claims recovered from reinsurer 50,000 Survey fees claim 10,000 Commission on reinsurance ceded 12,000 Expenses of management related to insurance 78,000 Claims paid 65,000 Reserve for unearned as on 01-01-2007 2,30,000 Claims outstanding as on 01-01-2007 27,000 Investment Income 18,500 Admn. Expense 5,000 Dividend received 18,000 Dividend paid 9,000