BRS

The balance shown on the bank statement may not be the same as that shown in the cash analysis books, 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 are complete. 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 are unreliable.

8.1 What is bank reconciliation?Bank reconciliation is the process of comparing you bank book entries with your bank statement balances at the end of each month, explaining any differences. Your organisation should receive a bank statement for your current account at the beginning of each month, detailing all transactions (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 on monthly statements, they will receive them only when a statement sheet is full – and that make take several months. If you do not currently receive monthly statements, ask your bank to start sending them.The balance shown on the bank statement may not be the same as that shown in the cash analysis books, and it is likely that neither shows the true financial situation of the organisation. This is because there is a delay between the date the entries are made in the books and their appearance on the bank statements, and some items on the bank statement may have gone unrecorded in the cash analysis book (such as bank charges, interest, standing orders, direct debits). Also, 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.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 are complete. 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 are unreliable.8.3 How do you do a bank reconciliation?

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)

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

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 a mistake with your cash book entries for that month, and you will need to check all of them carefully.

Following all of these checks, if the figures still do not add up properly, then it is possible that the 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 for commercial purpose. The borrower has to open a bank account. The bank grants the maximum limit of money to that account. Now the borrower can withdrew money from that account, as he or she needed. Again the borrower deposits money in the account, when he received the final payment from his customers. The main theme of this credit is that borrower pays interest only on the withdrawal amount. Intent is calculated on day basis. How many days the borrower use the loan 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 of raising finance (i.e. it is a type of loan account).

Meaning : Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take the amount 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 different purposes different types of loan can be taken. Eg. Incase the loan is required to purchase fixed assets like plant and machinery, term loan must be taken as plant and machinery are long term assets it will take time in repayment of the loan and repayment can be done in EMI's (Equated Monthly Installments). Where as a loan required for working capital needs a long term loan is not required as repayment does not require long period, hence cash credit may be availed.

Explanation of Cash Credit loan facility : If for eg. a person is having a business. To carry on this business he needs to purchase raw material, and sell the goods. For this he needs working capital to run his daily business. Working capital means current assets minus current liabilities. Where current assets comprise of investment in stock, sundry debtors, cash, etc., current liabilities comprise of sundry creditors, suppliers of stock(incase of stock taken on credit), etc. The reason working capital is current asset minus current liabilities because money is required to purchase stock, this stock when still not sold will be of some value for which cash is invested in it and the part that is sold but on credit to customers(debtors) here also cash is not received and cash is invested. Hence in both the items money is put in. On the other hand incase of stock which is purchased on credit (creditors) here no money is put in, i.e. the stock purchased without investment. Hence total amount of money put in or invested in running the business is only to the extent of money invested in stock in hand(for which money is paid) and debtors(where again money is invested) less the amount of stock received on credit form creditors(here the amount is not invested for purchase of stock). This working capital that is required to run the business can be either funded by the businessman him 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 working capital needs. The entire amount of working capital required is not funded by the bank, some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan. This is as per RBI rules. The amount of loan to be given is decided on the basis of different types of methods like MPBF (Maximum Permissible Bank Finance) suggested by Tandoon Committee or other methods. These methods use formulae which take into consideration actual working capital required. The amount so worked out is given as loan and is called as "limit" this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every 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 up some 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 loan amount that he can get is any amount which is not more than the "limit" of the loan given. If in the 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 required by him on that day is that the interest calculated is on daily basis on the amount borrowed by him on different days. i.e. if amount required by him say on a particular day is say Rs.92,000 but he takes 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 pay interest 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 bank will maintain the account in its own books and will provide the cash credit account holder with a monthly statement of the account. As for as accounting in the books of account of the borrower the amount of balance reflected in the statement as on the last date of accounting i.e. say 31/03/2007 called as outstanding balance

should be taken in the Balance sheet, liabilities side and the interest amount shown in the statement 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 CMS

Managing 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 company's 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

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 management When 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

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 businesses and 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 company's 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.

Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site.

Armored Car Services (Cash Collection Services): Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash.

Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer 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 from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise.

Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information 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, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.

Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account.

Lockbox - Wholesale: services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, 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 a dentist's office or small manufacturing company.

Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay

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 is reversed, with the company, not the bank, maintaining the list of checks issued. When checks are presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file 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 the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company's files.

Sweep accounts : are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds.

Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which 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 their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting 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 balance accounting is being used less frequently.

Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call.

Controlled Disbursement: This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is

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 rise of the Internet. For example, companies could have daily faxes of their most recent transactions or 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 the benefits: 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 not well understood bymany. What exactly does cash management mean and why is it important to you? The answers to these 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 some sort; we all have expenses andmany of us carry debts; and, with few exceptions, we must all pay taxes. Cash management is the process of managing your cashflow by controlling your expenses, minimizing taxes, and reducing the cost of debt, to ultimately create more bottom linesavings.The following diagram may help you understand this concept better in the context of your own personal financial world.The left side of the diagram reflects what is referred to as your cash flow. The right side depicts your net worth.

Looking at your cash flow (left side), your primary source of revenue during your working years is your employment orbusiness income. When you stop working, your source of revenue changes to pension and/or government benefits. At mosttimes during your working years, the cash coming in from employment should exceed what has to go out to cover basicliving expenses (food, clothing, shelter, transportation); discretionary expenses (holidays and entertainment); 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 wealthy family, or win a lottery, newwealth is only created by saving. The sooner we learn the truth of this statement, the easier it is for us to achieve our financialobjectives.TR evenue

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 manage your cash flow effectively isthe next imperative. In other words, how do you control living and discretionary expenses without severely cramping yourlifestyle? How do you reduce the cost of debt? And, how do you minimize taxes. The following discussion 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 is because most people savewhat only is left after everything else is paid. The problem with this approach is that there are always too many things onwhich our money can be spent, leaving nothing to be saved. Interestingly, our years of experience 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 work on a long-term basis. Amore sensible solution is to arrange your affairs so that a specified amount gets saved, before it gets spent. If you think thisis not possible, simply imagine getting a 10% cut in your income as a result of a new tax. We would 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 this is 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 many financial advisors. A moreappropriate figure, however, is whatever it takes to allow you to reach your objectives. That is why having a specific

personalized savings strategy is important. For some people 10% will do it, for others it may take 25%. It depends on howfar you have to go to arrive at your financial destination, and how much time you have to get there. But, whatever theamount, pay yourself first.This is a must for all except those who have already retired or who have been fortunate enough to achieve financialindependence. If you are in either of these categories, then saving is an activity in which you engaged in the past and,technically, you no longer need to save. In this case, you can probably skip straight to the last principle 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 it means to insure, to themaximum extent possible, that your family income will not be interrupted by pre-mature death or disability. 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 to maintain their family’schosen lifestyle. Not presuming upon tomorrow requires that you devote a small portion of your existing employmentincome to buying the appropriate insurance which will insure that your income will not be extinguished by death ordisability.It also means maintaining an adequate cash reserve for emergency purposes. A three to five month income reserve is a goodguideline, but the amount could vary considerably depending on the volatility of your employment 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 live beyond your means. This isseldom an easy principle for any of us to follow. In fact, in some cases you may not even be aware that you are “presuming3upon tomorrow.” However, turning a blind eye to this principle can be a recipe for disaster, as the 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. After performing 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 saved that amount for several

years. However, over the same period of time, Heather started earning quite a bit of extra income, and Todd was gettingsome bonuses. The problem is that the cost of their current lifestyle grew quickly to a lot more than $90,000, without themrealizing it. They were saving a fixed amount and grew accustomed to spending the rest. When Todd’s bonuses stopped,they had to axe their savings program “just to make ends meet.” They had unknowingly started presuming 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 a small business which waswiped out during the recent recession, requiring him to start over at age 45. Their financial advisor worked out a strategy forthem that relied on an ever increasing percentage of savings each year until James reached age 65. The graduated approach tosaving was to allow them the “luxury” of devoting a higher percentage of James’ current income to re-building their currentlifestyle. During his final working years, he had to save 30% of his income to achieve financial independence. This is not aproblem…unless James is not able to work to 65 as a result of a disability or job loss. Presuming too much on tomorrowcould leave them vulnerable late in life.The solution for most people in this situation is to achieve a delicate balance between spending for 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 objective advisor, and by doing regularupdates of your personalized savings and investment strategy, so that adjustments can be made as 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 the third. Still, there are amyriad of ways in which you can reduce your basic living and discretionary expenses, without reducing your lifestyle. A fulltreatise on the numerous tactics is beyond the scope of this information summary. What we want to stress here is the need tocultivate a prudent business-like attitude toward the management of basic and discretionary expenses.It was once “in vogue” to have the very best products and services available, regardless of the cost! For most of us, thatcredo has been replaced with a new one which states that you should attempt to acquire the benefits 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 new two year old similar vehicle

at a cost of $35,000. If the vehicle was disposed of after two years for $25,000, the cash flow improvement should averageat least $5,000 per annum, as opposed to the cost of driving the brand new car. This could translate to a portfolioenhancement of almost $70,000 over a 10 years period, if that $5,000 per year was invested in a fully taxable environmentaveraging 12% interest (assuming a 50% MTR). Turning this modest lifestyle adjustment into a habit 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 a business trip. Doing so wouldsave you $500 - $1,000 in airfare and allow you to take advantage of a preferred corporate rate for 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 after 20 years.There are numerous other such strategies, but the point is simple. It is not difficult to minimize the cost of your chosenlifestyle. Should you or other members of the family see the wisdom of such an approach but lack the necessary discipline toproactively minimize the cost of your chosen lifestyle, adhering closely to the first and second principles 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 was not acquired in order to earnincome is not deductible. Worse yet, most borrowing is done to acquire personal assets which depreciate in value, with thepossible exception of a home or cottage, though for some periods of time even the home and cottage have not beenexceptions.When borrowing to obtain personal assets is unavoidable, it is imperative that you never allow your debt-to-asset ratio toexceed 75%. Even within these guidelines, non-deductible debt should be eliminated as quickly as 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 example that perfectly illustrates thispoint is the true story of an elderly couple who kept their money in a chequing account to avoid paying tax on the interest

income. Someone had planted the idea in their minds that they were ahead of the game by paying no 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 their wealth was not enhanced inany way, by doing so! A better financial education, strategy or advisor would have earned them more money.There are four primary ways for you to maximize your after-tax disposable income: Deductions and Credits, Deferrals,Diminish and Divide. (Refer: 191T Principles of Tax Management for a detailed discussion regarding 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 your financial situation. Thesefive very basic principles provide a road map that can assist you in doing so. However, you must be motivated to put theseprinciples into practice for yourself, and, above all, you must have a financial strategy which can keep you on course towardyour ultimate financial goals.

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)

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

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 a mistake with your cash book entries for that month, and you will need to check all of them carefully.

Following all of these checks, if the figures still do not add up properly, then it is possible that the bank has made an error (it does happen!), and it will need to be contacted immediately.