BRSThe balance shown on the bank statement may not be the same as that shown in the cash analysisbooks, because, for examp...
It is very straightforward to do a bank reconciliation as long as you follow the nine steps below –one at a time and in th...
1. Place a small pencil tick against each cheque payment in the cash paid analysis book that       also appears on the ban...
Do not forget! - there may be some items from the previous bank reconciliation process         that are still outstanding ...
Explanation of Cash Credit loan facility : If for eg. a person is having a business. To carry on thisbusiness he needs to ...
should be taken in the Balance sheet, liabilities side and the interest amount shown in thestatement to be taken to Profit...
other clearing instruments into their possession itselfconsumes considerable time. Besides, often they find itdifficult to...
traditional checking features, investment and borrowing intoa single account. A central asset account saves you time andef...
Advanced Web Services: Most banks have an Internet-based system which is moreadvanced than the one available to consumers....
checks listed in that register, with exactly the same specifications as listed in the register(amount, payee, serial numbe...
different from delayed disbursements, where payments are issued through a remote       branch of a bank and customer is ab...
B asicT a x esD isc r e tion a r yD ebtS u rp lu sC ashP errssonal A ssssettsA ssse tss T hatt R eefleec t L iffeestty leB...
personalized savings strategy is important. For some people 10% will do it, for others it may take25%. It depends on howfa...
years. However, over the same period of time, Heather started earning quite a bit of extraincome, and Todd was gettingsome...
at a cost of $35,000. If the vehicle was disposed of after two years for $25,000, the cash flowimprovement should averagea...
income. Someone had planted the idea in their minds that they were ahead of the game by payingno tax. They wereshocked to ...
It is very straightforward to do a bank reconciliation as long as you follow the nine steps below –one at a time and in th...
1. Place a small pencil tick against each cheque payment in the cash paid analysis book that       also appears on the ban...
Do not forget! - there may be some items from the previous bank reconciliation process         that are still outstanding ...
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  1. 1. BRSThe balance shown on the bank statement may not be the same as that shown in the cash analysisbooks, because, for example: There is a delay between the date the entries are made in the books and their appearance on the bank statements Some items on the bank statement may have gone unrecorded in the cash analysis book (such as bank charges, interest, standing orders, direct debits) Cheques issued by the organisation, particularly towards the end of the month, may not yet have cleared through the account, and therefore do not appear on the statement.The main reason for the bank reconciliation is to make sure that your accounting records arecomplete. There may still be errors – you may have put something under the wrong heading –but at least you will know that you have recorded everything you should.Without the bank reconciliation, there is a serious risk that your accounting records areunreliable.8.1 What is bank reconciliation?Bank reconciliation is the process of comparing you bank book entries with your bank statementbalances at the end of each month, explaining any differences. Your organisation should receivea bank statement for your current account at the beginning of each month, detailing alltransactions (that is, money coming in and going out of the account) for the month just ended.Organisations which make few transactions each month may find that, unless they insist onmonthly statements, they will receive them only when a statement sheet is full – and that maketake several months. If you do not currently receive monthly statements, ask your bank tostart sending them.The balance shown on the bank statement may not be the same as that shown in the cash analysisbooks, and it is likely that neither shows the true financial situation of the organisation. This isbecause there is a delay between the date the entries are made in the books and their appearanceon the bank statements, and some items on the bank statement may have gone unrecorded in thecash analysis book (such as bank charges, interest, standing orders, direct debits). Also, chequesissued by the organisation, particularly towards the end of the month, may not yet have clearedthrough the account, and therefore do not appear on the statement.8.2 Why do you need to do a bank reconciliation?The main reason for the bank reconciliation is to make sure that your accounting records arecomplete. There may still be errors – you may have put something under the wrong heading, butat least you will know that you have recorded everything you should.Without the bank reconciliation, there is a serious risk that your accounting records areunreliable.8.3 How do you do a bank reconciliation?
  2. 2. It is very straightforward to do a bank reconciliation as long as you follow the nine steps below –one at a time and in the correct order using the sample: „bank reconciliation form‟ below.Figure 8 – Sample bank reconciliation formBank reconciliation for the month of _____________Section A: Cash book summary for the monthCash book balance brought forward from last month:Add: Total Cash Received for the month:(from Cash Received Analysis Book)Sub-total: _Less: Total cash paid for the month:(from cash paid analysis book)Equals: Closing cash book balance:(to carry forward)*********COMPARED TO:Section B: Bank statement summary for the monthBank statement balance at the end of the month:Add: Outstanding receipts(unticked in cash received analysis book)date reference no. amountTotal of outstanding receipts:Sub-total:Less: Outstanding cheques(unticked in cash paid analysis book)date cheque no. amountTotal of outstanding cheques:Equals: Adjusted bank statement balance:Signature:__________________ Date:__________________(by person who has prepared thebank reconciliation)Signature:__________________ Date:___________________(counter signature)
  3. 3. 1. Place a small pencil tick against each cheque payment in the cash paid analysis book that also appears on the bank statement. Tick the bank statement entry too. (If you are using an electronic spreadsheet such as Excel, you could create a spare column, in which you could type „r‟ = received.) 2. Place a pencil tick against each entry in the „banked‟ column of the cash received analysis book that also appears on the bank statement. Tick the bank statement entry too. 3. Check the bank statement for any entries which have not been ticked (which means they did not appear in the cash books), and enter them into the corresponding cash analysis book. For example, bank charges should be entered into the cash paid analysis book, and bank interest should be entered into the cash received analysis book (direct debits and standing orders should be dealt with in the same way). Once any entry has been made, tick it off in the cash book and on the bank statement. When you have completed these three steps, you know that every entry on the bank statement also appears in the cash analysis books. 4. Underline the end of month row in your Excel spreadsheet (or rule off your manual cash received and cash paid analysis books) and sum all the columns (in your manual books, add up all the columns) „crosscast‟ (see Section eleven for the glossary of financial terms) to check that the adding-up is correct. 5. Complete the „Cash book summary‟ (Section A) on the bank reconciliation form, using the figures from the ‟total‟ columns in the cash received and cash paid analysis books. Calculate the ‟closing cash book balance‟ for the month. You are now ready to complete Section B of the bank reconciliation form. 6. Look at the bank statement. Find the balance at the end of the month and enter this figure on the bank reconciliation form. 7. Check the cash received analysis book for any entries (in the relevant month) which have not been ticked. These are called outstanding receipts - they have been banked but have not yet cleared through the account. They should be entered in the „outstanding receipts‟ section of the bank reconciliation form. 8. Check the cash paid analysis book for any entries (in the relevant month) which have not been ticked. These are called outstanding cheques - the cheques have been issued but have not yet cleared through the account. They should be entered in the „outstanding cheques‟ section of the bank reconciliation form.3. The Basis Project online toolkit www.thebasisproject.org.uk
  4. 4. Do not forget! - there may be some items from the previous bank reconciliation process that are still outstanding and these need to be listed here as well. 9. Finally, add all the outstanding receipts to the bank statement balance and subtract all the outstanding cheques. This will give you the adjusted bank statement balance.The closing cash book balance should be the same as the adjusted bank statement balance,which proves the accuracy of your bookkeeping for the month. If the two figures are different,then you should first check your calculations and make sure that you have not missed anything.If, after checking, the figures still do not correspond, then it may mean that you have made amistake with your cash book entries for that month, and you will need to check all of themcarefully.Following all of these checks, if the figures still do not add up properly, then it is possible thatthe bank has made an error (it does happen!), and it will need to be contacted immediately.CASH CREDIT LOANS Generally cash credit is issued to the businessman. It is used forcommercial purpose. The borrower has to open a bank account. The bank grants the maximumlimit of money to that account. Now the borrower can withdrew money from that account, as heor she needed. Again the borrower deposits money in the account, when he received the finalpayment from his customers. The main theme of this credit is that borrower pays interest only onthe withdrawal amount. Intent is calculated on day basis. How many days the borrower use theloan have to pay interest on that day. Cash credit can be in two types. One is cash credit(Hypothecation) and another one is cash credit (Pledge).There are many ways in which finance can be raised Cash Credit is one of the many ways ofraising finance (i.e. it is a type of loan account).Meaning : Cash credit is an arrangement under which a customer of a bank or financialinstitution is allowed an advance up to certain limit against credit granted by bank. That means aloan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take theamount of loan to the extent required by him but not exceeding the limit of Rs. 1 Lakhs.Purpose : The purpose for which loan is required is essential to ascertain, as for differentpurposes different types of loan can be taken. Eg. Incase the loan is required to purchase fixedassets like plant and machinery, term loan must be taken as plant and machinery are long termassets it will take time in repayment of the loan and repayment can be done in EMIs (EquatedMonthly Installments). Where as a loan required for working capital needs a long term loan isnot required as repayment does not require long period, hence cash credit may be availed.
  5. 5. Explanation of Cash Credit loan facility : If for eg. a person is having a business. To carry on thisbusiness he needs to purchase raw material, and sell the goods. For this he needs working capitalto run his daily business. Working capital means current assets minus current liabilities. Wherecurrent assets comprise of investment in stock, sundry debtors, cash, etc., current liabilitiescomprise of sundry creditors, suppliers of stock(incase of stock taken on credit), etc. The reasonworking capital is current asset minus current liabilities because money is required to purchasestock, this stock when still not sold will be of some value for which cash is invested in it and thepart that is sold but on credit to customers(debtors) here also cash is not received and cash isinvested. Hence in both the items money is put in. On the other hand incase of stock which ispurchased on credit (creditors) here no money is put in, i.e. the stock purchased withoutinvestment. Hence total amount of money put in or invested in running the business is only to theextent of money invested in stock in hand(for which money is paid) and debtors(where againmoney is invested) less the amount of stock received on credit form creditors(here the amount isnot invested for purchase of stock).This working capital that is required to run the business can be either funded by the businessmanhim self or if he does not have the money he can take a loan i.e. Cash credit.In Cash Credit facility an amount of loan is given to the borrower/businessman for his workingcapital needs. The entire amount of working capital required is not funded by the bank, somesmall amount will have to be funded by the businessman and the balance amount will be fundedby a bank as a loan. This is as per RBI rules. The amount of loan to be given is decided on thebasis of different types of methods like MPBF (Maximum Permissible Bank Finance) suggestedby Tandoon Committee or other methods. These methods use formulae which take intoconsideration actual working capital required.The amount so worked out is given as loan and is called as "limit" this is because under this kindof loan the borrower may not take up the entire amount of loan as working capital requirementevery day is not the same, i.e. on one day the amount of working capital required may for eg.may be Rs. 96,000 and on a another day it may be Rs. 92,000 as some debtor might have paid upsome amount. Hence the businessman will require Rs.96,000 on one day and he will require Rs.92,000 on the other day only. He on a particular day may require Rs. 1,07,300 but the loanamount that he can get is any amount which is not more than the "limit" of the loan given. If inthe above eg. Limit is say Rs. 1 lakh then when he requires Rs. 1.07300 he will get loan upto Rs.1 lakh only.The reason why he should borrow different amounts on different days as per the amount requiredby him on that day is that the interest calculated is on daily basis on the amount borrowed by himon different days. i.e. if amount required by him say on a particular day is say Rs.92,000 but hetakes entire amount Rs. 1,00,000 he will have to pay interest on entire amount of Rs. 1 lakh.However if he would have only taken say Rs. 92,000 which he required he would have to payinterest on Rs. 92,000 only and not on Rs 1,00,000.Your second question as to by whom the account is maintained? The answer to that is the bankwill maintain the account in its own books and will provide the cash credit account holder with amonthly statement of the account.As for as accounting in the books of account of the borrower the amount of balance reflected inthe statement as on the last date of accounting i.e. say 31/03/2007 called as outstanding balance
  6. 6. should be taken in the Balance sheet, liabilities side and the interest amount shown in thestatement to be taken to Profit and Loss Account, debit side. CASH MANAGEMENT SYSTEMCash Management services is a new entrant in the IndianBanking Scenario. Cash Management Services (CMS) is amechanism to efficiently manage cash flow in order toreduce risks, minimize costs and maximize profits.Generally Cash Management comprises integrated collection,payments, liquidity management, and receivables functions.Speedy collection of outstation instruments is one of themajor products under CMS.CMS offers customised collection and payment services,which allow companies to reduce the realisation time ofcheques and streamline their cash flows. As the companiesget access to their funds faster, the need for companies toborrow cash comes down, and lowers their interest payout.In return, the banks charge the companies a fee based onthe volume of the transaction, the location of the chequecollection centre and speed of delivery. Some banks evenbuy the cheques and pay the corporates immediately,charging an interest fee for the number of days it takesthem to encash the cheques. Since CMS allows companies totrack their cash flows on a daily basis, financialdecisions happen faster and more efficiently.Need of CMSManaging liquidity is complex, as cash is volatile. For abusiness spread across various locations, managingoutstation fund-collections and disbursements can often bea time-consuming, expensive and exasperating proposition.Delays of days or even weeks in realising outstationcheques, constant tracking and follow-up to transfer fundsfrom outstation collection accounts, uncertainty and delaysregarding information on the fate of the cheque is common.These affect the companys liquidity position and it has tobear a higher interest cost. A remedy to this hazard surelyis the practice of cash management.Business entities with large network of branches, salesoutlets often have client base with wide geographicspread. Getting receivables through cheques, drafts and
  7. 7. other clearing instruments into their possession itselfconsumes considerable time. Besides, often they find itdifficult to have access to funds at the required timesince banks pass on the credit only on realisation.Corporate are not certain of the time lag to get theinstruments collected through normal channel of banks andget the funds credited to their accounts which hinders thetreasury management portfolio and strain their liquidityand profitability. Cash Management offers guaranteedcredit and timely MIS.CMS brings predictability of cash flows and helps inliquidity management." Sectors such as telecom, utilityservices, mutual funds and insurance companies benefit mostfrom it because they can pool their receipts from differentlocations in different forms (online, cheques, ECS andcredit cards) in a seamless manner. Four Steps to a Healthy Cash management Healthy cash flow is essential to the success of a smallbusiness. You may have the best service or product around,your employees and customers may love you, your office maybe well organized, but if you don‟t have the money to buyinventory or pay bills, you can‟t keep your businessrunning. Many business owners make the mistake of believingcash flow is largely out of their control. On the contrary,the following steps can really help.1. Analyze your financial conditionFinancial analysts, credit providers and knowledgeableinvestors rely heavily on financial ratios to judge thehealth of a firm. You should use these tools as well.Commonly used ratios can help you analyze your pricingstrategy, level of overhead, liquidity, the health of yourcash flow, your average collection period, theappropriateness of your collection terms and your inventoryturnover rate.2. Improve your cash managementWhen it comes to the cash flowing through your financialaccounts, your goals should be to ensure that incoming fundsspend as much time as possible earning interest or dividendsfor your benefit and that outgoing funds are available whenneeded. With a traditional business checking account,meeting these seemingly simple goals can be a complex task.You will have to move funds manually into a separate moneymarket account in order to earn interest or dividend incomeand back into your checking account to cover disbursementswhen due. An alternative is a central asset account, which combines
  8. 8. traditional checking features, investment and borrowing intoa single account. A central asset account saves you time andeffort by automatically putting your cash where it needs tobe, when it needs to be there. And by keeping your cash ininterest-bearing accounts right up until the momentdisbursements clear your account, a central asset accountcan also help increase your return and your bottom line.3. Even temporary fluctuationsNo matter how efficiently you manage your cash flow, theremay be times when your business needs more money than it hason hand. This is why adequate credit resources areessential. A business line of credit is useful andconvenient because it can be used as needed, paid down andreused without reapplying. When a line of credit isintegrated with a central asset account, credit isautomatically accessed when needed. And incoming fundsautomatically go to pay down your loan balance, reducingborrowing time and interest expense.4. Invest surplus cashAlthough part of your business capital needs to be liquid,most businesses have some capital that can be invested inshort- and intermediate-term securities for potentiallyhigher yields. A broad array of investments can be purchasedwithin a central asset account. And you can sell securitiesin your account at any time, or, if appropriate, borrowagainst their value2, to meet working capital needs. Be sureto discuss the risks of borrowing against your securitieswith your Business Financial Adviser. Today‟s business environment changes rapidly, and as abusiness owner, you need to regularly review your cash flowand cash management policies to ensure that they are helpingto keep your business competitive.The following is a list of services generally offered by banks and utilised by larger businessesand corporations: Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the companys true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay.
  9. 9. Advanced Web Services: Most banks have an Internet-based system which is moreadvanced than the one available to consumers. This enables managers to create andauthorize special internal logon credentials, allowing employees to send wires and accessother cash management features normally not found on the consumer web site.Armored Car Services (Cash Collection Services): Large retailers who collect a greatdeal of cash may have the bank pick this cash up via an armored car company, instead ofasking its employees to deposit the cash.Automated Clearing House: services are usually offered by the cash managementdivision of a bank. The Automated Clearing House is an electronic system used totransfer funds between banks. Companies use this to pay others, especially employees(this is how direct deposit works). Certain companies also use it to collect funds fromcustomers (this is generally how automatic payment plans work). This system iscriticized by some consumer advocacy groups, because under this system banks assumethat the company initiating the debit is correct until proven otherwise.Balance Reporting Services: Corporate clients who actively manage their cash balancesusually subscribe to secure web-based reporting of their account and transactioninformation at their lead bank. These sophisticated compilations of banking activity mayinclude balances in foreign currencies, as well as those at other banks. They includeinformation on cash positions as well as float (e.g., checks in the process of collection).Finally, they offer transaction-specific details on all forms of payment activity, includingdeposits, checks, wire transfers in and out, ACH (automated clearinghouse debits andcredits), investments, etc.Cash Concentration Services: Large or national chain retailers often are in areas wheretheir primary bank does not have branches. Therefore, they open bank accounts at variouslocal banks in the area. To prevent funds in these accounts from being idle and notearning sufficient interest, many of these companies have an agreement set with theirprimary bank, whereby their primary bank uses the Automated Clearing House toelectronically "pull" the money from these banks into a single interest-bearing bankaccount.Lockbox - Wholesale: services: Often companies (such as utilities) which receive a largenumber of payments via checks in the mail have the bank set up a post office box forthem, open their mail, and deposit any checks found. This is referred to as a "lockbox"service.Lockbox - Retail: services: are for companies with small numbers of payments,sometimes with detailed requirements for processing. This might be a company like adentists office or small manufacturing company.Positive Pay: Positive pay is a service whereby the company electronically shares itscheck register of all written checks with the bank. The bank therefore will only pay
  10. 10. checks listed in that register, with exactly the same specifications as listed in the register(amount, payee, serial number, etc.). This system dramatically reduces check fraud.Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process isreversed, with the company, not the bank, maintaining the list of checks issued. Whenchecks are presented for payment and clear through the Federal Reserve System, theFederal Reserve prepares a file of the checks account numbers, serial numbers, anddollar amounts and sends the file to the bank. In reverse positive pay, the bank sends thatfile to the company, where the company compares the information to its internal records.The company lets the bank know which checks match its internal information, and thebank pays those items. The bank then researches the checks that do not match, correctsany misreads or encoding errors, and determines if any items are fraudulent. The bankpays only "true" exceptions, that is, those that can be reconciled with the companys files.Sweep accounts: are typically offered by the cash management division of a bank. Underthis system, excess funds from a companys bank accounts are automatically moved intoa money market mutual fund overnight, and then moved back the next morning. Thisallows them to earn interest overnight. This is the primary use of money market mutualfunds.Zero Balance Accounting: can be thought of as somewhat of a hack. Companies withlarge numbers of stores or locations can very often be confused if all those stores aredepositing into a single bank account. Traditionally, it would be impossible to knowwhich deposits were from which stores without seeking to view images of those deposits.To help correct this problem, banks developed a system where each store is given theirown bank account, but all the money deposited into the individual store accounts areautomatically moved or swept into the companys main bank account. This allows thecompany to look at individual statements for each store. U.S. banks are almost allconverting their systems so that companies can tell which store made a particular deposit,even if these deposits are all deposited into a single account. Therefore, zero balanceaccounting is being used less frequently.Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can bedone by a simple bank account transfer, or by a transfer of cash at a cash office. Bankwire transfers are often the most expedient method for transferring funds between bankaccounts. A bank wire transfer is a message to the receiving bank requesting them toeffect payment in accordance with the instructions given. The message also includessettlement instructions. The actual wire transfer itself is virtually instantaneous, requiringno longer for transmission than a telephone call.Controlled Disbursement: This is another product offered by banks under CashManagement Services. The bank provides a daily report, typically early in the day, thatprovides the amount of disbursements that will be charged to the customers account.This early knowledge of daily funds requirement allows the customer to invest anysurplus in intraday investment opportunities, typically money market investments. This is
  11. 11. different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.In the past, other services have been offered the usefulness of which has diminished with the riseof the Internet. For example, companies could have daily faxes of their most recent transactionsor be sent CD-ROMs of images of their cashed checks.Cash management services can be costly but usually the cost to a company is outweighed by thebenefits: cost savings, accuracy, efficiencies, etc.Five Principles of Cash Managementhere are five simple principles which have the power to transform your financial circumstances.Together, theseprinciples constitute the bricks and mortar of cash management, a simple concept but one notwell understood bymany. What exactly does cash management mean and why is it important to you? The answers tothese two questionscould help you begin to build a better financial future.So what exactly is cash management? In simple terms: We all have an income stream of somesort; we all have expenses andmany of us carry debts; and, with few exceptions, we must all pay taxes. Cash management is theprocess of managing your cashflow by controlling your expenses, minimizing taxes, and reducing the cost of debt, to ultimatelycreate more bottom linesavings.The following diagram may help you understand this concept better in the context of your ownpersonal financial world.The left side of the diagram reflects what is referred to as your cash flow. The right side depictsyour net worth.Looking at your cash flow (left side), your primary source of revenue during your working yearsis your employment orbusiness income. When you stop working, your source of revenue changes to pension and/orgovernment benefits. At mosttimes during your working years, the cash coming in from employment should exceed what hasto go out to cover basicliving expenses (food, clothing, shelter, transportation); discretionary expenses (holidays andentertainment); debt repayment,and taxes, leaving something at the bottom for savings.This is particularly important because, unless you either are born into or marry into a wealthyfamily, or win a lottery, newwealth is only created by saving. The sooner we learn the truth of this statement, the easier it isfor us to achieve our financialobjectives.TR evenue
  12. 12. B asicT a x esD isc r e tion a r yD ebtS u rp lu sC ashP errssonal A ssssettsA ssse tss T hatt R eefleec t L iffeestty leB ussiineessss/O ttheerr A ssssettssM anaged A ssseetssA ssetts T haat F u ndF iinanciiaal O bjje cttiveesC ash M an ag em en t A sse t M a n a g em en t2Once you have acknowledged that cash management is indeed critical, learning how to manageyour cash flow effectively isthe next imperative. In other words, how do you control living and discretionary expenseswithout severely cramping yourlifestyle? How do you reduce the cost of debt? And, how do you minimize taxes. The followingdiscussion of thePrinciples of Cash Management should help you answer these important questions.PRINCIPLE #1: PAY YOURSELF FIRSTThis principle is quite literal, but its implementation often requires an attitudinal shift. This isbecause most people savewhat only is left after everything else is paid. The problem with this approach is that there arealways too many things onwhich our money can be spent, leaving nothing to be saved. Interestingly, our years ofexperience have shown this to betrue, regardless of whether you earn $50,000 a year or $500,000 a year. In fact, those who earn$500,000 a year have asmuch if not more difficulty saving as those who earn $50,000.For most people, however, a budget is not the solution. Budgets are like diets. They seldom workon a long-term basis. Amore sensible solution is to arrange your affairs so that a specified amount gets saved, before itgets spent. If you think thisis not possible, simply imagine getting a 10% cut in your income as a result of a new tax. Wewould all grumble, but wewould soon find a way to manage, probably without major adjustments to our lifestyle.But how do you actually save before spending? For most people, the best way to implement thisis to set up an automaticpre-authorized savings plan, which assures that you do indeed “pay yourself first.”What amount should you pay yourself? Ten percent (10%) is the rule of thumb touted by manyfinancial advisors. A moreappropriate figure, however, is whatever it takes to allow you to reach your objectives. That iswhy having a specific
  13. 13. personalized savings strategy is important. For some people 10% will do it, for others it may take25%. It depends on howfar you have to go to arrive at your financial destination, and how much time you have to getthere. But, whatever theamount, pay yourself first.This is a must for all except those who have already retired or who have been fortunate enoughto achieve financialindependence. If you are in either of these categories, then saving is an activity in which youengaged in the past and,technically, you no longer need to save. In this case, you can probably skip straight to the lastprinciple and begin exploringways to maximize your net after tax income.PRINCIPLE #2: DO NOT PRESUME UPON TOMORROWThis is the most difficult principle to articulate, as it has several meanings. First and foremost itmeans to insure, to themaximum extent possible, that your family income will not be interrupted by pre-mature death ordisability. Once again, forsomeone who is already financially independent, this is not an issue.This principle is crucial, however, for anyone who counts on continuing employment income tomaintain their family‟schosen lifestyle. Not presuming upon tomorrow requires that you devote a small portion of yourexisting employmentincome to buying the appropriate insurance which will insure that your income will not beextinguished by death ordisability.It also means maintaining an adequate cash reserve for emergency purposes. A three to fivemonth income reserve is a goodguideline, but the amount could vary considerably depending on the volatility of youremployment income. Normally, the“reserve” should constitute the cash component of your non-registered investment portfolio.On a more subtle level, do not presume upon tomorrow means making sure that you do not livebeyond your means. This isseldom an easy principle for any of us to follow. In fact, in some cases you may not even beaware that you are “presuming3upon tomorrow.” However, turning a blind eye to this principle can be a recipe for disaster, asthe following examplesdemonstrate:SCENARIO "A": Todd and Heather plan to retire when Todd reaches age 55, on an income of$75,000 per annum (stated intoday‟s net after tax dollars). The cost of their current lifestyle has been about $90,000. Afterperforming a retirementplanning analysis, their financial advisor told them that they needed to save $15,000 per annum(indexed to inflation) untilTodd turns 55, in order to achieve their goal. This seemed to pose no problem. They easily savedthat amount for several
  14. 14. years. However, over the same period of time, Heather started earning quite a bit of extraincome, and Todd was gettingsome bonuses. The problem is that the cost of their current lifestyle grew quickly to a lot morethan $90,000, without themrealizing it. They were saving a fixed amount and grew accustomed to spending the rest. WhenTodd‟s bonuses stopped,they had to axe their savings program “just to make ends meet.” They had unknowingly startedpresuming on tomorrow,thinking their “extra income” would continue forever.SCENARIO "B": A contrasting example is found in the story of James and Helen. James had asmall business which waswiped out during the recent recession, requiring him to start over at age 45. Their financialadvisor worked out a strategy forthem that relied on an ever increasing percentage of savings each year until James reached age65. The graduated approach tosaving was to allow them the “luxury” of devoting a higher percentage of James‟ current incometo re-building their currentlifestyle. During his final working years, he had to save 30% of his income to achieve financialindependence. This is not aproblem…unless James is not able to work to 65 as a result of a disability or job loss. Presumingtoo much on tomorrowcould leave them vulnerable late in life.The solution for most people in this situation is to achieve a delicate balance between spendingfor today and saving fortomorrow. In fact, this is important for all of us.Adherence to this principle is more easily assured by working with a knowledgeable objectiveadvisor, and by doing regularupdates of your personalized savings and investment strategy, so that adjustments can be madeas they are required.PRINCIPLE #3 MINIMIZE THE COST OF YOUR CHOSEN LIFESTYLETo some degree, adherence to the first two principles helps to assure that you are following thethird. Still, there are amyriad of ways in which you can reduce your basic living and discretionary expenses, withoutreducing your lifestyle. A fulltreatise on the numerous tactics is beyond the scope of this information summary. What we wantto stress here is the need tocultivate a prudent business-like attitude toward the management of basic and discretionaryexpenses.It was once “in vogue” to have the very best products and services available, regardless of thecost! For most of us, thatcredo has been replaced with a new one which states that you should attempt to acquire thebenefits of having the bestproducts and services, but at the lowest possible price.For example, rather than acquiring a new $50,000 vehicle, one may opt to acquire a nearly newtwo year old similar vehicle
  15. 15. at a cost of $35,000. If the vehicle was disposed of after two years for $25,000, the cash flowimprovement should averageat least $5,000 per annum, as opposed to the cost of driving the brand new car. This couldtranslate to a portfolioenhancement of almost $70,000 over a 10 years period, if that $5,000 per year was invested in afully taxable environmentaveraging 12% interest (assuming a 50% MTR). Turning this modest lifestyle adjustment into ahabit would translate intonearly $200,000 more in your portfolio, after 20 years.Another prudent habit to cultivate is that of tagging your personal holiday on to the end of abusiness trip. Doing so wouldsave you $500 - $1,000 in airfare and allow you to take advantage of a preferred corporate ratefor an extended stay, whichcould easily boost your savings by another $500 - $1,000. No sacrifices in lifestyle are required,just good timing. Turnedinto a habit, this would mean an extra $28,000 in invested capital after 10 years, or $78,000 after20 years.There are numerous other such strategies, but the point is simple. It is not difficult to minimizethe cost of your chosenlifestyle. Should you or other members of the family see the wisdom of such an approach butlack the necessary discipline toproactively minimize the cost of your chosen lifestyle, adhering closely to the first and secondprinciples provides anexcellent start in the right direction.4PRINCIPLE #4: AVOID NON-DEDUCTIBLE DEBTNon deductible debt should be avoided like the plague. The interest you pay on debt which wasnot acquired in order to earnincome is not deductible. Worse yet, most borrowing is done to acquire personal assets whichdepreciate in value, with thepossible exception of a home or cottage, though for some periods of time even the home andcottage have not beenexceptions.When borrowing to obtain personal assets is unavoidable, it is imperative that you never allowyour debt-to-asset ratio toexceed 75%. Even within these guidelines, non-deductible debt should be eliminated as quicklyas possible, but not to thetotal exclusion of savings (Principle #1) or risk management premiums (Principle #2).PRINCIPLE #5 PLAN TO MAXIMIZE AFTER TAX DISPOSABLE INCOMEMaximizing your after-tax disposable income is a principle that seems simple. Sometimes,however, people get wrapped upin the need to minimize tax at any cost, and lose sign of the aim of this principle. An examplethat perfectly illustrates thispoint is the true story of an elderly couple who kept their money in a chequing account to avoidpaying tax on the interest
  16. 16. income. Someone had planted the idea in their minds that they were ahead of the game by payingno tax. They wereshocked to learn that they would actually get to keep about 50% of the income that their$200,000 earned each year. At only6%, that still amounted to $6,000 per annum. Yes, they had been minimizing their tax, but theirwealth was not enhanced inany way, by doing so! A better financial education, strategy or advisor would have earned themmore money.There are four primary ways for you to maximize your after-tax disposable income: Deductionsand Credits, Deferrals,Diminish and Divide. (Refer: 191T Principles of Tax Management for a detailed discussionregarding increasing your cashflow through effective tax planning).THE BOTTOM LINEThe bottom line is that it is possible to start from wherever you are and radically transform yourfinancial situation. Thesefive very basic principles provide a road map that can assist you in doing so. However, you mustbe motivated to put theseprinciples into practice for yourself, and, above all, you must have a financial strategy which cankeep you on course towardyour ultimate financial goals.
  17. 17. It is very straightforward to do a bank reconciliation as long as you follow the nine steps below –one at a time and in the correct order using the sample: „bank reconciliation form‟ below.Figure 8 – Sample bank reconciliation formBank reconciliation for the month of _____________Section A: Cash book summary for the monthCash book balance brought forward from last month:Add: Total Cash Received for the month:(from Cash Received Analysis Book)Sub-total: _Less: Total cash paid for the month:(from cash paid analysis book)Equals: Closing cash book balance:(to carry forward)*********COMPARED TO:Section B: Bank statement summary for the monthBank statement balance at the end of the month:Add: Outstanding receipts(unticked in cash received analysis book)date reference no. amountTotal of outstanding receipts:Sub-total:Less: Outstanding cheques(unticked in cash paid analysis book)date cheque no. amountTotal of outstanding cheques:Equals: Adjusted bank statement balance:Signature:__________________ Date:__________________(by person who has prepared thebank reconciliation)Signature:__________________ Date:___________________(counter signature)
  18. 18. 1. Place a small pencil tick against each cheque payment in the cash paid analysis book that also appears on the bank statement. Tick the bank statement entry too. (If you are using an electronic spreadsheet such as Excel, you could create a spare column, in which you could type „r‟ = received.) 2. Place a pencil tick against each entry in the „banked‟ column of the cash received analysis book that also appears on the bank statement. Tick the bank statement entry too. 3. Check the bank statement for any entries which have not been ticked (which means they did not appear in the cash books), and enter them into the corresponding cash analysis book. For example, bank charges should be entered into the cash paid analysis book, and bank interest should be entered into the cash received analysis book (direct debits and standing orders should be dealt with in the same way). Once any entry has been made, tick it off in the cash book and on the bank statement. When you have completed these three steps, you know that every entry on the bank statement also appears in the cash analysis books. 4. Underline the end of month row in your Excel spreadsheet (or rule off your manual cash received and cash paid analysis books) and sum all the columns (in your manual books, add up all the columns) „crosscast‟ (see Section eleven for the glossary of financial terms) to check that the adding-up is correct. 5. Complete the „Cash book summary‟ (Section A) on the bank reconciliation form, using the figures from the ‟total‟ columns in the cash received and cash paid analysis books. Calculate the ‟closing cash book balance‟ for the month. You are now ready to complete Section B of the bank reconciliation form. 6. Look at the bank statement. Find the balance at the end of the month and enter this figure on the bank reconciliation form. 7. Check the cash received analysis book for any entries (in the relevant month) which have not been ticked. These are called outstanding receipts - they have been banked but have not yet cleared through the account. They should be entered in the „outstanding receipts‟ section of the bank reconciliation form. 8. Check the cash paid analysis book for any entries (in the relevant month) which have not been ticked. These are called outstanding cheques - the cheques have been issued but have not yet cleared through the account. They should be entered in the „outstanding cheques‟ section of the bank reconciliation form.3. The Basis Project online toolkit www.thebasisproject.org.uk
  19. 19. Do not forget! - there may be some items from the previous bank reconciliation process that are still outstanding and these need to be listed here as well. 9. Finally, add all the outstanding receipts to the bank statement balance and subtract all the outstanding cheques. This will give you the adjusted bank statement balance.The closing cash book balance should be the same as the adjusted bank statement balance,which proves the accuracy of your bookkeeping for the month. If the two figures are different,then you should first check your calculations and make sure that you have not missed anything.If, after checking, the figures still do not correspond, then it may mean that you have made amistake with your cash book entries for that month, and you will need to check all of themcarefully.Following all of these checks, if the figures still do not add up properly, then it is possible thatthe bank has made an error (it does happen!), and it will need to be contacted immediately.

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