ASSESSMENT OF CASH AND RECEIVABLES MANAGEMENT

[A CASE STUDY OF OROMIA INTERNATIONAL BANK,

ADAMA BRANCH]

A RESEARCH PROJECT PREPARED FOR PARTIAL

FULFILLMENT OF REQUIREMENTS OF BA DEGREE IN
ACCOUNTING AND FINANCE

PREPARED BY: BELAY ELIAS 02024387

TUJI ENDALE 02025289

ADVISOR: IBRAHIM KEDIR (MSC)

SUBMITTED TO: DEPARTMENT OF ACCOUNTING AND FINANCE

SCHOOL OF BUSINESS (SOB)

ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY

ADAMA, ETHIOPIA

JUNE, 2012
 Acknowledgement

It was a willingness of GOD, the merciful the almighty and most passionate to
finalize this Paper.

Firstly, we would like to express our heartfelt appreciation and gratitude to our
sincere advisor Ibrahim Kedir (Msc) for his critical guidance, valuable advice,
suggestions and constructive comments on preparation of this paper at every
stage from title selection through finalizing.

Next, we would like to extend our warmest gratitude to OIB in general and Dear
Tesfaye, who is customer service manager of this bank in particular. We also wish
to acknowledge our sincere gratitude to the entire individuals who assisted us in
accomplishing this task.

Thirdly, our bountiful thanks go to ASTU accounting and finance department and
librarians.

At last, but not least, our respect full thanks go to our family and peers.
Abstract
Business organizations sometimes encounter a variety of problems in their day today
activities. Banks are one of service providing business organizations and they face
problems related with managing their working capital. Due to this reason, this study
was conducted to assess the cash and receivables management (which are part of
working capital) of oromia international bank, Adama branch. The study was intended
to assess the cash and receivables management of this bank. To conduct this study the
descriptive type research was designed and used.

Researchers have used both primary and secondary data to conduct this paper. The
data was collected by busing observation, interview, questionnaires, reading manuals
and annual reports and by visiting the banks website from both primary and secondary
data sources.

Relevant data was collected, presented and interpreted and finally lead to
recommendation and conclusion of the study.
 Acronyms
OIB: Oromia international bank

CD: checkable deposit

FTD: Fixed time deposit

FCD: Foreign currency deposit

CBE: Commercial bank of Ethiopia

NBE: National bank of Ethiopia

OBS: Orobanks software

LAN: Local area network

NPL: Non performing loan

ASTU: Adama science and Technology University

IMF: International monetary fund

EFT: Electronic fund transfer

 Table of content

Contents Page

Acknowledgement………………………………………………………………….

Acronyms……………………………………………………………………………………

Abstract……………………………………………………….................................

Chapter One……………………………………………...........................................

1. Introduction………………………………………………………………..

1.1. Background of the study………………………………………….

1.2. Profile of the organization……………………………...................

1.3. Statement of the problem……………………………………………

1.4. Objectives of the study……………………………………………….

1.4.1. General objective…………………………………………………

1.4.2. The specific objective…………………………………………...

1.5. Significance of the study……………………………………………..

1.6. Scope/Delimitation of the study………………………………………

1.7. Limitation of the study……………………………………………

1.8. Methodology of the study…………………………………………..

1.8.1. Target population………………………………………………

1.8.2. Sample size……………………………………………………….

1.8.3. Sampling techniques……………………………………………..

1.8.4. Data and sources of data…………………………………………..

1.8.5. Methods of data collection……………………………………………………

1.8.6. Methods of data analysis…………………………………………………

1.8.7. Organization of the paper……………………………………………

Chapter Two……………………………………………………………………
2. Review of related literature………………………………………………………….

2.1. Cash management………………………………………………………………..

2.1.1. Definition and meaning of cash and its management……………

2.1.2. Importance and objective of cash management……………………..

2.1.3. Major sources of cash for banks………………………………………

2.1.4. Reasons for holding cash…………………………………………………

2.1.5. Advantage and cost of holding cash……………………………………….

2.1.6. Techniques of cash management…………………………………………….

2.1.7. Cash overage and shortage………………………………………………

2.1.8. Physical protection of cash balance……………………………………….

2.1.9. Cash transaction and electronic fund transfer…………………………….

2.1.10. Petty cash………………………………………………………………..

2.1.11. Bank reconciliation………………………………………………….

2.1.12. Cash budget…………………………………………………………...

2.2. Receivables Management………………………………………………………

2.2.1. Definition and classification of receivables………………………………

2.2.2. Credit information………………………………………………

2.2.3. Credit scoring……………………………………………….

2.2.4. Banks loan type and lending procedures………………………..

2.2.5. Nonperforming loan……………………………………………

Chapter Three…………………………………………………………………

3. Data presentation and analysis……………………………………………….

3.1. Data analysis and discussion……………………………………………….

3.2. Sources of cash for the bank…………………………………………

3.3. Policies and strategies of cash balance……………………………………

3.3.1. Implications of cash shortage and overage……………………………

 3.3.2. Cash shortage and overage management……………………………

3.3.3. Internal control over cash……………………………………………

3.4. Receivable management………………………………………………………

3.4.1. Pre requirements for granting loan/credit……………………………

3.4.2. Nonperforming loan…………………………………………………………

Chapter Four…………………………………………………………………………….

4. Summary, conclusion and recommendation…………………………………….

4.1. Summery and conclusion………………………………………………………

4.2. Recommendations………………………………………………………….

Reference

Appendix
 Chapter One
1. Introduction
1.1. Back ground of the study

These days it is obvious that any business organizations are engaged in various
business activities either to maximize their profit or maximize the wealth of
shareholders or both. Banks are one of the numerous business organizations engaged
in service providing organizations. To attain this objective in realizing their goals they
must take advantage of its strength and try to correct their downsides. In relation with
this the working capital assessment of the firm enables it to assess the overall
performance and to identify the possible reasons for the weakness and thus allowing
management group to take actions to improve the organizations performance.

In today’s world, as the business activities become more complex, firms are forced to
utilize and manage their working capital (cash and receivables) in effective and
efficient manner at least to be survived or achieve their predetermined goal. An
assessment of cash and receivables management is the process of identifying the
strength and weakness around the management of cash and receivables management
of the company. On other hand it is aimed for: Assessment of cash and receivables
management, efficient and effectiveness of these working capital components.

This study mainly concerned with assessing the management of cash and receivables
of Oromia international bank Adama Branch.

The management of cash and receivables (components working capital) is one of the
most crucial activities in any business organization to achieve their objective.

The study will define what cash and receivables management are and assess them
weather it is being managed in effective and efficient manner in Oromia International
Bank, Adama Branch. This study was also expected to provide the better means of
managing cash and receivables to this bank and other similar business organizations.
It also enables the researchers to have ability to conduct a research on certain title.

This paper will be help full to the future researchers who want to conduct research on
this area as a hint. Our study was conducted on this area, because most of the time
organizations fail to achieve their objective due to weak management of this working
capital management. Yet others interrupt their operation and may inter in to
bankruptcy. Due to this and other reasons researchers were interested to conduct their
paper on this area of working capital.

In addition a careful design of cash and receivables is required, because this part of
working capital management is the most important for any business organizations.

Their logical management is also required because they are easily misappropriated.
Cash is non –earning asset. The management of cash involves having optimum neither
excessive nor deficient amount of cash at right time. The proper cash management
requires that the company should know how much cash needed as well as how much it
has, where that cash is at all times and how it is being managed. The appropriate
receivables management begins with the decision of whether to grant credit or not.

1.2. Profile of Oromia international bank (OIB)

Oromia international banks share company (S.C) was established on September 18,
2008 that adds to the total banks in the country to be 13 and the 10 th private

commercial banks. It is one the banks in the country providing both domestic and

international financial services. Oromia international bank (OIB) has received its
license from the national bank of Ethiopia on September18, 2008 and commenced its
operation on October 25, 2008. The bank had been expended its branch network
aggressively. The head office of this bank exists in Addis Ababa. Oromia international
bank s.c has been established with the laws and regulations commercial code Ethiopia
1960, monetary and banking proclamation No. 83/1994 and licensing supervision of
banking proclamation No.592/2008 and obtained the banking business license in
September 2008.

It has started its operation on October 2008 with the commercial banking business
objectives.

The major objectives of OIB establishment was to undertake a universal commercial

banking services such as deposit mobilization, lending of money, remittance of service
and international banking services as stipulated by the law of the land.

The bank has been established and started its’ banking operation with the aim of
achieving the following short and medium term objectives;

 Receiving demand, saving and other deposits on the terms and conditions

the board may prescribe.

 Granting medium term ad short term facility

 Encouraging income generating projects for urban and rural and micro

and small and medium operators.

 Providing counseling services to clients, rendering managerial, marketing

technical and administrative advices customer/borrower and assisting to

obtain services

 Providing loans, advance and overdraft facility.

 Draw, accept, discount, buy and sell bills of exchange, draft promissory notes
within or outside the country.
 Issue letters credit
  Buy, sell, hold and otherwise deal in foreign exchange
 Hold acquire and sell negotiable instruments, securities, movable and non
movable property including collaterals held
 Accept, for self keeping in safe or otherwise securities, jewels and precious
metals and other valuable properties.
 Issue checks and travelers cheques and generally deal in cheques
 Negotiate, underwrite and manage the issue of the shares, bonds and
debentures.
 Acts as agents for banks’ customers and engage in the purchase and sell of
money and securities.
 Enter into contract, of surety ship on guarantee with or without security.
 Borrowing funds for the company’ operation and providing and earmarking
company’s properties as a security for the funds obtained.
 Engage in all other banking and related transactions pursuit of quality banking
services.

Generally OIB is providing full banking services including:

 Domestic banking services

 Lending services
 International banking services and others.

The bank has currently more than 30 branches. The OIB, Adama branch is one
its branches which was opened in 2008 having the above vision, mission and
objectives or values of the bank. Currently this branch has 25 employees consisting
five female and twenty male employees.

1.3. Statement of the problem

For any organization to achieve its objectives and under take its operation effectively
and efficiently it is necessary to develop and maintain appropriate and logical way of
managing their working capital.

Every organization should manage their working capital effectively and efficiently to:
  Ensure adequate amount of cash on hand

 Avoid loss caused by misappropriation of cash and receivables management

 Ensure technical in solvency and

 Improves strategies and techniques they use if any

Like any other organizations, this bank was also suffering from various problems.
These problems were related to cash and receivable management of the bank.
Related to receivables the bank was suffering from problems such as delay of
collection and loss some times.

Related to the cash, this bank was suffering from problem of cash shortage and
overage. Sometimes the cash balance became below the requirement. The cash
payment exceeds the collection some times and collection exceeds payments other
times. Hence, this study was conducted to answer the following research questions:
I. What were the perquisite criteria to grant credit or loan to the staff and
customers?
II. What was the factor responsible for delay of the receivables collections?
III. What were logical strategies and techniques to be employed to avoid or
minimize problem related to cash and receivable collection?
IV. What were the major problems related to these resources management.
1.4. Objectives of the study

These studies had both the general and specific objectives.

1.4.1. General objectives

As a general this research was conducted to assess the management of both cash and
receivables in Oromia International Bank at satisfactory level. At the end the study
assessed and evaluated their management of cash and receivables by using different
techniques to reach conclusion and finally to forwarded the recommendations.

1.4.2 Specific objectives

 The specific objectives of the study include the following:

 To assess factors that affects cash and receivable management

 To justify if or whether this banks cash and receivables management is

ideal.

 To identify and assess the strategies and techniques being employed in

this bank to manage cash and receivables.

 To find feasible solution for its problems.

1.5. Significance of the study

Every study intends to have certain importance and this was also true for this paper. Its
significance includes due to some companies less awareness about managing their
working capital (cash and receivables management in particular.) It was important
because of companies less awareness that they are going to bankruptcy or ceases their
operational activity due to misappropriation. This study was expected to provide
benefit to this bank and manager to have more awareness about its liquidity position
and increase the efficiency and effectiveness on this area. This research was expected
to provide managers with some possible techniques for management of cash and
receivables.

This study was forecasted to inspire this bank to manage its cash and receivables in
proper and logical manner and increase its efficiency and effectiveness to have
attractiveness within and outside the country.

1.6. Scope/Delimitation of the study

This research was conducted on Oromia International bank, Adama branch. The
intention of study was assessing the cash and receivables management of the bank.
This study was conducted to deal with only assessment of cash and receivables
management of this bank. Due to shortage of budget, time and other factors the study
was conducted being limited to assessment of cash and receivables management of
this bank.
1.7. Limitation of the study

While conducting any research, it is natural that every one faces problems which may
become hindrances for researchers to conduct their study smoothly. During
conducting this paper, the researchers also encountered various problems that hindered
the successfulness of this study to reach at expected findings.

Among others the following were the actual limitation of this study:

 The shortage of availability of well organized data: This factor was the most
complex area of the researchers study. Because business organizations do not
want to expose their information openly. So the researchers have tried their
best to conduct their study depending on the available data as much as
possible.

 Lack of sufficient time to collect disorganized data of the study if any:

Absence of ample time given for student to conduct this paper was also other
complexities faced on this task.

 Reluctance of manager and employees to provide data for this study: Another
memorable hindrance was carelessness and reluctances of some staff members
to provide required data for the researchers.

1.8. METHODOLOGY OF THE STUDY

1.8.1. Target population

The target population is determinant sources of any study as the researcher collects
crucial information from them. The target population for this research was the
stakeholders (managers, employees, customers and owners) of bank as necessary.

1.8.2. Sample size

Sample is subset of larger population used to provide important data for the
researchers. Because of time and financial constraint and other factors to get more
reliable and accurate information the researchers used sample of population. The
sample size (target population of this paper were managers and selected employees
(staff members.)

1.8.3. Sampling techniques

The type of research intends to be conducted was descriptive type of research. This
study was designed to obtain information concerning management of cash and
receivables of Oromia international bank. Therefore for this research purposive
sampling technique in which sample population from the staff member was
purposively selected because they are assumed to be rich information intended to be
obtained.

1.8.4. Data and sources of data

For this research primary and secondary sources of data were used. The data used for
this study was published materials, Annual reports and website of the bank (for
secondary data sources) and the primary data were collected through questionnaire,
interview and observation (for primary data sources.)

1.8.5. Methods of data collection

For primary sources of data questionnaires, interviews, and observation were used. For
secondary data sources the researchers collected data through reading published
materials, and annual reports. Researchers have also visited the bank’s website.

1.8.6 .Methods of data analysis

This study have used descriptive data analysis method for further transaction and
interpretation collected data as it is a form that is easy to understand and interpret the
result. Among the descriptive analysis that the study have used; percentage and
tabulation were used to analyze and interpret the collected data to reach the
conclusion. The researchers mostly interpreted the data qualitatively.
 1.8.7. Organization of the paper

This study was organized in the following bases: The first chapter contains
background of the study, background of the organization, statement of the problem,
objective of the study, significance of the study, scope and limitation of the study.
Chapter two contains related literature review. The third chapter contains data analysis
and interpretation. Finally, the last chapters will deals with conclusions and
recommendations and reference/bibliography.

Chapter Two

2. Review of Related Literature

2.1. Cash Management

2.1.1. Definition and Meaning of Cash and Its Management

According to Pan (2005) cash is an asset that is easily convertible to any type of
assets. It is easily reconciled and transported and it is highly desired. Cash is defined
as a demand deposit plus currency. It is often called “a non earning asset.” It is often
needed to pay for labor, raw materials, to buy fixed assets, to pay salary, to pay taxes,
to pay dividend and etc.

According to Mosich NA, Cash is a medium of exchange which bank accepts for
deposits and immediate to the depositors account. To safe guard and assure the
accuracy of accounting records of cash effectively and efficiently internal control over
cash is very important. Cash includes coins, paper money, bank draft, checks, money
order, creditor card, sales draft and money on hand or deposits in bank. Cash
important current assets for the operation of the business. It the basic input needed to
keep the business running on continuous basis. Cash is also the ultimate output
expected to be realized by selling service or product. The organization should keep
sufficient cash, neither too much nor too little on hand. The cash shortage will disrupt
the firms operations, while excessive cash will simply remain idle without any
contribution.

According to dictionary of finance and investment terms corporate finance, efficient

mobilization of cash in to income producing applications, using computer,
telecommunication technology, innovative investment vehicle and lock box
arrangements.

Investing: Brokers make efficient movement of cash and keeping working.

Cash management: It is a financial management technique used by corporate

treasurers to accelerate the collection of receivables control payments to trade
creditors and efficiently manage cash.

2.1.2. Importance and Objectives of Cash Management

According to Geber, Davidson, Stickney and Well, the management of cash is
involves two distinct objectives:

First, a firm establishes a system of internal controls to ensure that cash is safeguarded
from theft or embezzlement. Typically internal control includes separation of duties of
individuals handling cash receipts and disbursements, deposits cash receipts
immediately, disbursing cash only by authorized checks and preparing bank account
reconciliation regularly.

Second, management wants to regulate cash balances that neither too much nor too
little cash available at any time. During inflationary periods idle cash loses purchasing
power and thus decreases in real value. A firm does not want to maintain excessive
cash balance. On the other hand, a firm does not want to have cash shortage, because,
the firm unable to meet its obligation as they become due or unable to take advantage
of cash discounts. The objectives of cash management are to invest excess cash for a
return while retaining sufficient liquidity to satisfy future needs. The goal of cash
manager is to minimize the amount of cash the firm must hold for use in conducting
normal business activities. The cash management involves having the optimum,
neither excessive nor deficient amount of cash at the right time.

The proper cash management needs how much it has and where that cash is at all
times. The excess cash should be invested in marketable securities for a return. A
financial manager must plan when to have excess funds available for investment and
when money needs to be borrowed. The amount of cash to be held depends up on
different factors such as cash management policy, current liquidity position,
managements' liquidity risk preference, schedule of debts security, the firms ability to
borrow, foretasted short term and long term cash flows, the probabilities of different
cash flows under various circumstances and etc.

Cash management also requires knowing the amount of funds available for investment
and the length of time for which they can be invested. A firm may invest its funds in
the following:
 1. Time Deposits including saving accounts earning daily interest, long term
saving and certificate of deposits.

2. Money Market Funds which are managed portfolios of short term, high grade
debt instruments such as treasury bills and commercial papers.

3. Demand Deposits that pay interest.

4. Governmental Treasury securities

In selecting investment portfolio, consideration should be given to return, default risk,

marketability and maturity debt. The trust of cash management is to accelerate receipts
and to delay payments. Cash management is concerned with the management of cash
inflows and outflows of the firm and cash balance held by the firm at a point of time
financing deficit or investing surplus cash.

Cash is significant because it is used to pay the firms obligation.

The cash management is also important, because it is difficult to predict cash flows
accurately, particularly inflow and outflows of cash.

In order to resolve the uncertainty about cash flow prediction and lack of
synchronization between cash receipts and payments firms should develop appropriate
strategies regarding the following four cash management facts.

1. Cash Inflows and outflows should be planned to project surplus or deficits.

2. The firm’s cash flow should be properly managed.

3. The firm should decide appropriate level of cash balance.

4. The surplus cash should be properly invested to earn profits

2. 1.3. Major sources of cash for Banks

Depository institutions must be prepared to satisfy the withdrawal of all funds by the
depositors and to provide loans to their customers. The first step in banking industry is
having optimal cash balance. This optimal cash balance can be raised by:

 Attracting additional depositors or investors

 Selling securities
 Using existing securities as collateral
 Raising short term funds in the money market.
Basically there are three sources of funds for banks. These are:

Deposits: It is the main sources of fund for bank and is divided into three
as follows:

a. Checkable Deposits: Is an account that allows the owners of the account to

write checks to the third party. It is the lowest cost of financing for banks.
These types of deposit can be withdrawn up on demand.

b. Saving Deposit: This type of deposit pay interest to the depositors. They do not
have specific maturity date. They can usually be withdrawn up on demands.

c. Time Deposit/Certificate of Deposit: This type of deposit has a fixed maturity

date. It pays either fixed or floating interest rate to the depositors.

2.1.4. Reasons for Holding Cash

According to Ros(2001), Pan(2005) Every organizations hold their cash for various
reasons including:

1. For transactions: The cash balances associated with routine payments and
collection are known as transaction balances.

2. Compensation balance: A deposits held by a bank to compensate it for

providing services.
 3. Precautionary Balance: This is money held for emergency purposes or to meet
unexpected cash needs. The more predictable cash flows for the firm, the less
cash that is needed for precautionary purposes. The ready borrowing power to
meet emergency cash drains also reduces the needs for this type.

4. Speculative Balance: Some cash balances may be hold to enable the firm to
take the advantage of bargain purchase that might arise.

According to Hamptom(1989) not all of the firms need for cash call for holding cash
balance exclusively. Indeed, a portion of this need may be met by holding marketable
securities or cash equivalents.

In addition to this needs for cash several important factors can be identified affecting a
firm’s size of cash balance;

1. Availability of short term credit: Firms can make arrangements to borrow

money for running unexpected needs than holding unnecessary large cash
balance. He explained it as a formal or informal agreement for a bank to
provide credit if requested.

2. Money Market Rate: It consists of the institutions and individuals who lend or
borrow money as apart of normal course of business activity. The level of
interest rate whether high or low affects the size of firms cash balance to be
maintained. If interest rate is very high, a firm invests its cash. But if interest
rate is low, a firm will not invest, because it has a lower return. Therefore a
firm keeps excess cash on its checking account, which leads to an increase
firm’s cash balance.

3. Variation in cash Flow: Some firms experience wide fluctuation in cash flows.
This will happen due to delays in payment. This leads to variation in
maintaining cash balance

2.1.5. Advantages and costs of holding Cash

According to Ros(2001) The advantages of holding cash include the following:

  It is essential that firms have sufficient cash and near cash assets to take
advantages of trade discounts.

 Adequate holding of cash and near cash assets can help the firm maintains its
credit rating (investors' confidence).

 Cash and near cash assets are use full for taking advantages of favorable
business opportunities.

 They should have sufficient cash and near cash assets to meet cash needs for
emergencies such as strikes, fires or competitors marketing campaign and to
withstand with seasonal and cyclical down turns.

And he described the costs of holding cash as: when a firm holds cash in excess of
some necessary minimum it incurs an opportunity cost. The opportunities costs of
holding cash can be the interest income earned by investing it in bank. So, it may have
to raise cash in short term basis such as borrowing or selling marketable securities.
These activities will force the firm to incur additional cost due to these reasons, to
determine the appropriate cash balance the firm must weigh the benefit of holding
cash against these costs.

2.1.6. Techniques of Cash Management

Several types of cash management are discussed bellow as.

Bank accounts: Depositing account of your income in to single bank account can make
it a bit easier for cash to slip through your fingers sitting aside of specific amounts of
money in to saving account or secondary checking accounts can help the organization
to stick the budget.

Time bound Investment: Placing money in time bound investment can help to keep in
safe utilizes earning reasonable return.

Budgeting: Is the corner stone of any sound financial plan.

Budgeting is simply the process of tracking of your monthly expenses to determine
how you are really spending your money. By making a list of monthly expenses you
can discover areas where you can reduce or even eliminate spending or expenses.

Investing: An effective way to manage investment cash is to start a systematic

program that allows you to invest within little pain and effort.

Credit: Credit can help you in times when you are little short on cash or facing
financial emergency.

2.1.7. Cash short and Over

According to KEI (2004) A cash short and over account is used when the petty cash
fund fails to prove out. When this occurs, it is usually due to an error (failure to
provide correct change over payment of expenses, lost receipt, etc.) If cash proves out
short (e.i. when the sum of the receipt and cash in the fund is less than the imp rest
amount), the shortage is debited to the cash short and over account.

If the cash proves out over, the overage is credited to cash short and over account.

This account is left open until the end of the year, when it is closed. It is generally
shown on income statement as “other expense or revenue.” Under the imp rest cash
fund system the petty cash custodian is responsible at all times for amount of funds on
hand either as cash or in form of signed receipts. These receipts provide evidence
required by the disbursing officer to issue reimbursement check. Two additional
procedures are followed to obtain more complete control over petty cash fund:

1. Surprise accounts of the fund are made from time to time by a superior of petty
cash custodian to determine that the fund is accounted for satisfactorily.

2. Petty cash receipt are canceled or mutilated after they have been submitted for
reimbursement, so that they cannot be used to secure a second reimbursement.

2.1.8. Physical Protection of Cash Balance

According to KEI (2004) Not only must cash receipt and cash disbursements be
safeguarded through internal control measures, but also the cash on hand and in banks
must be protected physically. Because receipt becomes cash on hand and disbursement
made from cash in banks, adequate control receipts and disbursement are part of
protection of cash balances

Physical protection of cash is so elementary a necessity that it requires little

discussion. Every support should be made to minimize the cash on hand in office. A
petty cash fund, the current day’s receipts, and perhaps funs for making change should
be all that is on hand at any time. As much as possible these funds should be kept in a
vault, safe or locked cash drawer. Every day receipts should be transmitted to the bank
as soon as practicable. Accurately stating the amount of available cash both in internal
financial statement is also extremely important.

Physical control is related primarily to the safeguarding on assets, such controls

include:

 Bank safe deposit boxes for important business paper.

 fencing company's property

 locked ware house for inventories

 locked storage cabinets for accounting records

 Self contained computer facilities with pass key access by authorized

personnel.

2.1.9. Cash transaction and electronic fund transfer

According to Fess Warren currently most cash transactions are inform of currency or
checks. The development of electronic fund transfer may eventually change the form
in which many cash transaction are executed and could affect the processing and
controlling of cash transactions.
Electronic fund transfer (EFT): can be defined as a payment system that uses
computerized electronic impulses rather than paper (money, checks etc) to effect a
cash transaction. The file is transmitted over the telephone lines to the banks designed
by employees. Some companies uses EFT systems to process both cash payments and
cash receipts. Studies have indicated that EFT may reduce the cost of processing
certain cash transactions and contribute to the better control over cash receipts and
cash payments.

2.1.10. Petty cash

According to Fess Warren as previously emphasized, adequate internal control over

cash requires that all receipts be deposited in the bank and all significant
disbursements be made by check. However, every business finds it convenient to have
a small amount of cash on hand with which to make some minor expenditure.

In most business there is a frequent need for the payment of relatively small amounts,
such as for postage due, transportation charges or for purchase of urgently needed
supplies. Payment by check in such case would result in delay, Annoyance and
excessive expense of maintaining a special cash fund called petty cash.

In establishment of a petty cash fund, the first step is to estimate the amount of cash
needed for disbursements of relatively small amounts during a certain period such as a
weak or a month. If the voucher system is used, a voucher is then prepared for this
amount and it is recorded in the voucher register as a debit to petty cash and a credit to
accounting payable. The money obtained from the cash in the check is placed in
custody of specific employee who is authorized to disburse the fund according to
restrictions as to maximum amount and purpose. When the amount of money in the
petty cash fund is reduced to the predetermined minimum amount, then it is
replenished. Replenished the petty cash fund restores it to its original amount. Because
disbursements are not recorded in the accounts until the fund is replenished, the petty
cash fund and other special funds that operate a like manner should always be
replenished at end of an accounting period.
2.1.11. BANK RECONCILIATION

According to KIE (2004) at the end of each calendar month the bank supplies each
customer with bank statement (a copy of the bank account with) together with the
customer checks that have been paid by the bank during the month. In no errors were
made by the bank or customer, if all deposits made, all checks drawn by the customer
reached the bank within the same month and if no usual transaction occurred that
affected either the company's or the e banks customer would be the same as shown in
customer’s own records. This condition seldom occurs. The differences between the
customers and record of cash and the banks record are usual and expected. Therefore
the two must be reconciled to determine the nature of the differences between the two
amounts. The common reconciling items are:

Deposit in transit: End of month deposits of cash recorded on the depositor’s books
in one month are received and recorded by the bank in the following month.

Outstanding checks: checks written by depositors are recorded when written but may
not be recorded by (may not “clear”) the bank until next month.

Bank charges: charges recorded by the bank against depositors balance for such
items as bank services, printing checks, not sufficient fund (NSF) checks and safe
deposit box . The depositor may not be aware of these charges until the receipt of bank
statement.

Bank credit: collections or deposits by the bank for the benefit of the depositors that
may be unknown to the depositors cause the bank balance to disagree with depositors
book balance.

Meigs, William, Haka Bettner (1999) the step in preparing bank reconciliation
includes:

1. Compare deposits listed on bank statement with deposits shown in the

accounting records. Any deposits that are not recorded by the bank are deposits
in transit and should be added to the balance shown in the bank statement.
 2. Arrange paid checks in sequence by serial numbers and compare each check
with corresponding entries in accounting records. Any checks issued but not
paid by the bank should be listed as outstanding checks to be deducted from
the balance recorded in the bank statement.

3. Add to the balance per the depositors accounting records any credit
memorandum issued by the bank that has not been recorded by the depositor.

4. Deduct from the balance per the depositors recorded any debit memorandum
issued by the bank that has not been recorded by the depositor.

5. Make appropriate adjustment to correct any errors in either the bank or the
depositors’ accounting record.

6. Determine that the adjustment balance of the bank statement is equal to the
adjusted balance in the depositor’s records.

7. Prepare journal entries to record any items in the bank reconciliation listed the
adjustments to the balance per depositor’s record.

2.1.12. Cash Budget

According to Ros (1995) cash budget is” a forecast of ach receipt and disbursement
for the planning period. It is the result of an estimated of cash surplus and deficit.”

According to Van Horn (1989) A cash budget is commonly a monthly forecast of

receipts and disbursements. It tells us the likely availability of cash with receipt to
both timing and magnitude.

According to Hor (2004) the cash budget is a statement of planned cash receipt and
disbursement. The cash budget is heavily affected by the level of operations
summarized in the budgeted income statement. The cash budget helps the
management to avoid having un necessary idle cash one hand and un necessary cash
deficiencies on the other hand. A well managed financing program keeps cash balance
from becoming too large or too small.
According to Bri (2002) the cash budget shows the firms projected cash inflow and
outflows over some specified period. Generally firms use a monthly cash budget
forecasted over the next year plus a more detailed daily or weekly cash budget for the
coming month. T he monthly cash budget are used for planning purposes and the
daily or weekly cash budget provides more detailed information concerning a firms
future cash flows than do the fore casted financial statement.

2.2. Receivables Management

2.2.1. Definition and classification of Receivables

Receivables are an assets designation applicable to all debt, unsettled transaction or

other monetary obligation owed to a company by it debtors or customers. They are
recorded by a company’s’ accountants reported the balance sheet and they include all
debt owed to the company, even if debts are not currently due. Receivables are
recorded as an asset by the company because it expects to receive payment for the
outstanding amount soon. Long term receivables, which do not come due for a
significant length of time, are recorded as long term assets on the balance sheet; most
short term receivables are considered as a part a company’s current assets.

(WWW.investopedia.Com)

According to Fess warren ( ?)The term receivables include all money claims against
people, organizations or other debtors. Receivables are acquired by business
enterprises in various kinds of transactions, the most common are being the sale of
goods or services on credit basis. Credit may be granted on open accounts or on the
basis of formula instrument of credit such as promissory note. A promissory note
frequently referred to as note; is written promise to pay a sum of money on demand or
at definite time. Notes are usually used for credit period of more than sixty days as in
the sales of equipment on the installment plan, and for the transactions of relatively
large dollar amounts. Notes may also be used in settlement of open accounts and in
borrowing or lending money. From point of view of the creditor, a claim evidenced by
note has some advantage over a claim in the form of an account receivable. By signing
a note the debtor acknowledges the debt and agrees to pay it according to the term
given. The note is therefore stronger legal claim if there is a court action. It is also
more liquid than an open account because the holder can usually transfer it to more
readily to bank or other financial agency in exchange for cash. An enterprise owning a
note refers to it as note receivables. If notes and account receivables originate from
sales transaction they are sometimes called trade receivables. Other receivables
include interest receivables, loan to officers or employees and loan to affiliate
companies. To facilitate their classification and presentation on balance sheet a
general ledger account should be maintained for each type of receivables with proper
subsidiary ledgers. All receivables that are expected to be realized in cash within a
year are presented in current asset section of balance sheet. Those that are not
currently collectable such as long term loans should be listed under the caption of
investment below the current asset section

2.2.2. Credit Information

One aspect of processing procedure is gathering credit information. The gathering and
complaining of information on borrower or other customer’s forms part of the task of
the credit investigators. Bankers should be shifted, systematized and compiled for use
in future when the need arise. Furthermore, the procedures should be kept up-to-date.
Banks are usually gather information from a given standard formats. The most usually
used methods to gather information from borrower includes capital, capacity,
character, credit worthiness and collateral.

2.2.3. Credit Scoring

Once the information has been gathered, the firm faces the hard case of either
granting or refusing credit. Many firms use the traditional and subjective
guidelines referred to as “5 Cs of credit.”
a. Character: Refers to The customer’s willingness to meet the credit
obligation.
b. Capacity: Is the customer’s ability to meet the credit obligations out of
operating cash flow.
 c. Capital: The customers financial services
d. Collateral: A pledged assets in the case of default.
e. Condition: The general economic condition.

2.2.4. Banks Loan Types and Their Lending Procedures

Bankers provide different types of loans. The main types of loan they provide include:

1. Term Loan: It is a loan granted to customers to be repaid within specific period of

time. It has three main divisions namely short term loan, medium term loan and long
term loan based on the repayment duration period.

A. Short term Loan: This is the loan with maturity period f one year from the debt of
signing the loan contract.

Purpose of the loan: It is to finance the working capital needs and / to other short term
financing constraint.
Repayment period: Is quarterly, semi annually based on the cash flow generating
capacity of the business.
B. Medium Term Loan: This is a loan which has a maturity period exceeding one
year but less than five years from the date of signing the loan contract.
C. Long-term Loan: This is a loan which has maturity period between five and
fifteen years.
Purpose: To finance new projects to working capital needs.
Repayment Period: Is repaid quarterly, semiannually and yearly.
Grace period: May be granted depending on the nature of project.

2. Overdraft Loan: This is a credit facility by which a customer can withdraw in

excess of current account balance up to limit approved by the bank.

Purpose of the Loan: Is the day to day operational need of available business.
Repayment Period: Customers should pay the accrued interest regularly so that the
facility is not over due.
Collateral: An overdraft facility can be approved against collateral acceptability by
the bank, except for motor vehicle and machinery.
3. Merchandise Loan: This is a credit facility provided by the bank to overcome cash
flow problems when money is tied up with merchandise.

Collateral: Merchandise itself.

4. Agricultural Loan: This is a loan granted to customers whom are engaged in

agricultural production activities.

5. Import Letter of Credit Loan: This is an instrument where by payments

international trade is affected by banks through documents. It is issued by the bank at
the request of the buyer (importer) to pay seller (exporter) up on presentation of
import documents, specified in the documents.

Purpose of the Loan: Is to finance the temporary working capital shortage of

customers during to importation of goods.

Repayment Period: The facility has to be renewed every six months or every year.

6. Export Credit Guaranty: There are three types of export credit guaranty.

A. Pre-shipment Export Credit: It is a loan granted to non coffee exporters starting

from the procurement of input until the date of shipment of goods to Ethiopian
national Bank guarantee.

B. The Revolving Export Credit Facility: It is an advance extended to exporters with

a limit margin before are loaded on the board up on presentation of all relevant export
documents to the bank except bill of loading.

C. Advance on Export Bills: It is a post shipment exports with a margin against

presentation of necessary documents.

(CBE: Manual.)

2.2.5. Non Performing Loan (NPL)

Loan: is the act of giving money, property or other material goods to another party in
exchange for future repayment of the principal and interest or other finance charges.
Non Performing Assets: A debt obligation where the borrower has not paid any
previously agreed up [on interest and principal repayments to the designated lender for
an extended period of time.

Incipient Default: When a borrower appears to be lending towards defaulting on its

debts. An incipient default means fore shadowing of a person or companies inability to
service debt obligation.

A non performing loan (NPL) is a loan that is in default or close to being in default.
Many loans become none performing after being in default for three months, but this
can be depend on the contract terms. “A loan is nonperforming when payment of
interest and principal are past due by ninety days or more, or at least ninety days (90)
of interest payments have been capitalized, refinanced or delayed by agreements.”
(IMF)

Bank regulatory Definition: Non performing loan consists of:

 Other Real Estate owned which that is taken by fore closure a deed in lieu of fore
closure.
 Loans that are ninety days or more past due and still acquiring interest.
 Loan which have been placed on accrual (i.e. loans for which interest is no longer
accrued and posted to the income statement).

Non performing loan institutions holding non performing loans in their portfolios
may choose to sell them to other investors. In order to get rid of risky assets and
clear up their outstanding sales of non performing loan must be carefully
considered since they can have numerous financial implications including
affecting the company’s profit, loss and tax situations.
(WWW.Investopedia.com)
 Chapter Three

3. Data presentation and analysis

3.1. Data analysis and Discussion

Table3.1. Personal attribute of respondent

Respondents Number Percentage (%)

Sex Male 4 67

Female 2 33

Total 6 100

Diploma 1 17

Degree 5 83

Master -

Total 6 100

Experience <5 years 1 17

5-10 years 3 50

10-15 years 2 33

15-20 years -

Total 6 100

Position Branch manager 1 16.67

Customer service manager 1 16.67

Credit manager 1 16.67

Accountant 2 33

Cashier 1 16.67

Total 6 100

Sources: Questionnaires
To collect relevant data, both primary and secondary sources of data were used. The
data was collected from primary data sources by observation, questionnaire and
interview techniques.
For secondary data sources, the researchers collect data through published materials
such as annual reports, manuals and visited the banks website. In conducting this
research purposive sampling techniques have been used, because, in this type of
technique a sample from the staff member were purposively selected, because they are
assumed to be rich in information intended to be collected. The data was mostly
interpreted qualitatively.
3.2 Sources of cash for Oromia International bank

For any organization there should be sources of cash to run its daily activities or
operation smoothly, because cash is a single basic asset needed for various functions.
It is known that the sources of almost all banks except the national banks are the same.
The main sources of cash for the banks include deposits (checkable, saving and fixed
time) deposits and others. AS the data collected and analyzed by researchers, the
sources of cash for banks are also true for Oromia International bank, Adama branch.
Shortly their main sources of cash include deposits, telegraphic money transfer, sales
of shares and foreign currency deposits accounts. As per response obtained their main
sources of cash can be explained as:

Checkable deposit (CD)

 This deposit is also demand deposit, current account or checking account is non
interest bearing account.
 It can be opened or operated jointly or individually.
 This account is operated through a negotiable checkable.
 The minimum initial deposit required to be open this account is 500 birr for private
individuals and 1000 birr for companies or associations.
 In order to ensure due eligible and fulfilling principle of know your customers,
documents such as valid Id card, trade license and other relevant documents are
required to open a demand deposit account.
 It can be withdrawn up on demand i.e. there is no restriction on this deposits.
 It is the lowest cost sources of cash for banks and it is active type of deposit.

b. Saving deposit account:

 It is an interest bearing account

 These are deposits that payable on demand but do not allow their owner to write
checks to the third party.
 There is also a special saving deposit account with anon interest bearing account
nature to address the need of Muslim customers.
 It can be opened or operated individually or jointly.
 The interest rate paid on this deposit is 5% which is determined by the National
Bank of Ethiopia (NBE).
 This account is operated through a booklet called passbook.
 The minimum initial deposit required to open this account is 50 birr.
 It can be also be opened and maintained with zero balance with the expectation
that the account holder will deposit the required minimum balance in one month
period.
 In order to insure the diligence and fulfilling the principle of customers, documents
such as valid ID card, two passport size photographs and other relevant documents
are required to open a saving deposit accounts.
 This deposit does not have a fixed maturity date.
c. Fixed time deposit account (FTDA)
 This is deposit having fixed maturity.
 The interest paid on this deposit is negotiable.
 IT is a type of deposit which is kept without movement for a certain period and
attracts higher interest rate than the prevailing saving deposit interest rate.
 The minimum period accepting fixed time deposit (FTD) account is three
months.
 The owner of this deposit is given a certificate.
 The rate of interest is varies according to the duration and amount of deposit.
 Early withdrawal of fixed time deposit entails forfeiting the contract interest rate.
 d. Foreign currency deposit accounts (FCDA)
  It is checking account dominated in foreign currencies opened by eligible non
residents.
 These include a non resident transferable (NRT) accounts to local currency
and non-resident non-transferable (NRNT) accounts to local currency.

The bank uses this funds raised inform of checkable or demand deposit, saving
deposit, fixed time deposit and foreign currency deposit accounts to make commercial,
consumer and mortgage loan and to buy a government securities and bonds.

The problem is that the branch has limited sources of cash because the source is
almost deposits only. Sometimes depositors are not willing deposit their money as
much as they have better investment opportunities. This may be the cause for
fluctuation of optimum cash balance of this branch.

3.3 Policies and strategies of cash balance

As per the responses (table 3.2), the majority of the respondent said that it is better for
the bank to have neither excess nor minimum amount of cash on hand to operate the
daily activities continuously. The minority also response that having excess cash is
good for the bank which is not supportable. Any organization is expected to manage
their cash balances effectively to achieve their predetermined objective, which is
maximization of the wealth of share holders for business organizations. Theoretically,
the cash management involves having optimum, neither excessive nor deficient
amount of cash on hand at any time.

In line with this researchers collected data by using different techniques from
respondents that this branch has it is own optimum cash balance, neither excess nor
minimum to be maintained on hand at a right time. This optimum amounts is first
determined by head office depending on daily operation of the branch. Once this
balance determined, the branch take responsibility to maintained and manage over this
amount. The optimum amount determined for this branch by head office is Birr
3,000,000(three million birr) only. Whenever the cash balance of bank is excess or
below the optimum balance, this branch maintained it using various techniques.
However the cash balance of this branch fluctuates. That means the cash balance
become below this optimum balance some times and above this balance other times.

Table3.2. Response for policies and strategy of cash balance

Items options respondents

number Percentage
(%)

What amount of cash do you Excess 2 33

want to have on hand at any Minimum
time? Optimum 4 67
Total 6 100

Is this bank policies and Yes 5 83

strategies are effective to check No
the amount of cash on hand at Not
any time? always 1 17
Total 6 100

How do you handle over it there

is excess cash on hand in this
bank?

How about if the bank counters

shortage of cash un expected?

Source: Questionnaires,

3.3.1. Implication of cash shortage and overage

Cash shortage: refers to a time when cash balances become below the required
amount to going on its operations smoothly. It has negative effects the branches daily
operations. Therefore this cash shortage should be removed and the optimum amount
should be maintained at any time. Because it implies that it may quit the operation.

Cash overage: this is when the cash balance is above the required balance. It implies
there is excess cash (idle) on hand which has no earning. Theoretically; idle cash
should be invested in short term marketable security for a return. So, as idle cash has
no earning it must be invested.

3.3.2.. Cash shortage and overage management

According to the response obtained, the majority of respondent replied that the branch
wants to have optimum; neither minimum nor excesses amount of cash on hand at
right time. But whenever there is deviation the branch maintains it by using different
methods. In normal course of operation, organizations can face the cash shortage or
overage surprisingly.

Researchers collected data, analyzed and able to understand that whenever the cash
balance becomes below the optimum this branch restores the balance as follows:

The Oromiya international bank, adama branch has its own account at commercial
bank of Ethiopia (CBE). This account is called issue account maintained at
commercial bank of Ethiopia, which represent the local bank for national bank of
Ethiopia (NBE). As per responses obtained whenever there is excess cash on hand in
this branch, the idle cash is deposited at this account. The researchers also able to
understand that, they later transfer this deposit to home office payment and settlement
account.

Therefore, if the branch face shortage of cash unexpectedly it can withdraw the
required amount and restore the cash balance to the optimum amount. On the other
hand if the balance it has from this account is not enough to restore the optimum
balance, the branch request the home office (HO) to deliver them the required amount
through telegraph or transport. In summary, the cash deposited at commercial bank
earns no interest. As per the response, this amount is transferred to the head office and
the head office invests this amount in favorable investment. Depending on the
response obtained and analysis made, the researchers have appreciated the strategy
and it is effective way of cash management.

To sum up, the drawback of this system of cash management is that, the deposited
amount does not earning any return for this branch, which not logical because the idle
should be invested in short term investment which provide earning. In addition, if the
branch always waits for the head office to restore the balance whenever there is a
deviation it may results in interruption of the operation as money is very determinant
in banks operations.

3.4. Internal control over cash.

Table 3.3

Item 0ption Respondent

Number %

Is there any fraud or misappropriation Yes 1 16.67

of cash in this bank?
No 4 66.66

Not always 1 16.67

Total 6 100

If your answer for the above question is’

No’ what techniques enabled the bank
to avoid or minimize fraud of cash?

Source: Questionnaires

As observed from the above table minority of respondents argue that there is a fraud
sometimes but not always. However, the majority of them replied that there is no fraud
in this branch. Researchers also understood from the data collected and analyzed that
fraud is minimum this branch. As per the responses oromia international bank, adama
branch uses different methods to avoid or minimize the fraud. One of the methods is
that, the branch is controlled by the head office. OIB has commenced its operation
with the help of in house developed orobank software (OBS) in which all branches are
networked by local area network (LAN) and computerized. The researchers have also
able to understand that they use the following methods to have strong internal control
over cash.

I. General ledger /control account/

 They do have controlling general ledger in which both debit and credit
transaction of the day should be balanced.
 These transactions are also posted to computer timely.
 It is a self balancing ledger accounts.
 This account is used to classify the information recorded in transaction by their
respective accounts.
 The general Ledger is served as bases to prove equality of debit and credit
balance.
 This ledger is maintained by accountant of this branch.
II. Internal control over cash by internal auditor.

From the data collected and analyzed researchers identified that crucial control is
performed by internal auditor on daily transactions. Accordingly, the internal auditor
daily review the transaction takes place in this branch starting from source of
document up to the physical verification of the cash balances. Every transaction taken
place in this branch is also posted to the computer timely. The internal auditor also
Counts the cash balance physically as necessary. All the daily transactions are
reviewed, checked and analyzed by the internal auditor and the report is prepared for
the manager.

I. Using principles of Internal Control

 The branch also uses the principle of internal control to have strong internal
control. The main principles being used by this branch are the following:

A. Establishment of Responsibility and Segregation of Duties

Every employee in this branch has their own responsibility. Tasks are
segregated to each individual. For instance the duty of accountant is deferent
from the task of cashier.

The duties of accountant include:

 Maintaining receivables and payables accounts

 Prepare the weekly transaction report for the manager
 The responsibility of maintaining general ledger is also duty accountant
 Accountant also checks that the information on the general ledger is
posted correctly as the response obtained.
Cashier is responsible for:
 Keeping the cash on hand
 Provide cash to the tellers who receive and make payments.

The tellers are responsible for receiving and making cash payment but the activity is
performed by deferent tellers. The problem here that, as the response obtained from
questionnaire and interviews the activities of recording receivables and preparing bank
reconciliation, as well as maintaining payable and receivables account is being done
by accountant. As the receivables and payables accounts are related activities, it may
lead to misappropriation unless they are being done by deferent individuals.

B. Documentation Procedures:
It is known that documents provide evidence that transactions and events have
occurred. The documents of transactions are made when the transaction occur.
The documents used in this branch is pre numbered to prevent the transactions
not be recorded more than once. As transactions are source of document for
accounting entries, they promptly forwarded to the accounting clerk to help
insure that timely recording of transactions and events. Therefore, it is
 possible to say that this branch prevents or at least reduces the risk of fraud or
errors which may result due to the absence of this activity.
C. Independent Internal Verification:
This is specially used in comparing accountability with existing records. The
duty of employee is rotated which is designed to protect employees from any
theft since they will not be able to permanently cancel their improper action.
Whenever embezzlement has been existed, it has been discovered when the
perpetrator is assigned to a new position or on vocation. The daily cash
deposited to and withdrawn from are also checked by the internal auditor. To
sum up, this branch uses proper internal control procedures to minimize fraud
related to cash.
II.Bank Reconciliation
Table 3.4

Items options Respondents

Number %

Is the bank reconciliation is Yes 6 100

prepared at the end of each month? No
Total 6 100

If your answer for the above is Manager

‘yes’ who is responsible for its Cashier
preparation? Accountant 6 100
Other
Total 6 100

Source: Questionnaires
This branch prepares bank reconciliation monthly by the accountant of this
branch. This is because of the balance shown on the bank statement would
rarely agrees with the balance of cash shown on the depositors books.
Therefore, it is important to adjust the difference between the monthly
 bank statement and the balance shown on the book of depositor and this is
possible only through bank reconciliation. The balance per bank and the
balance per book are adjusted each month. The bank statement is the
statement that shows the balance of bank per bank and book balance shows
the balance per depositor in bank.
III. Petty Cash Fund: It is natural that every organization makes small
payment for items such as postage, local transport, minor repairs and
clearing premises. Such payments are made without checks. Under
imprested system, fixed cash at advance is maintained and periodically
replenished for the expense incurred during the period. For such
payments, oromia international bank Adama branch has petty cash fund
for this small expenditures. The amount of petty cash fund to be
maintained is determined by the head office first and the branch maintain
and use it for its daily operation. This amount is determined by head
office to be birr 2000 for this branch. This amount used for small and
miscellaneous expense and replenished periodically. Currently the petty
cash of this branch is being managed by the customer service manager
the branch. The problem with this is that as this customer service
manager is also vise manager of this branch fraud may be done. Because,
in absence of branch manager this may also participate on managing
checking the cash balance with the internal auditor. In this case, two
activities concerned with cash management are merged together which
may results in misappropriation.

3.5. Receivable management

Table 3.5

Items option Respondent

Number %

What are the prerequisites to grant in terms of qualitative

credit /loan to customers?

For how long do you grant credit? In terms of qualitative

Who is responsible for recording of these Manager

banks receivables?
Accountant 6 100

Casher

Other

Total 6 100

What techniques does this bank use to In terms of qualitative

collect its receivables timely and without
delay and loss?

Does this bank collect its receivable on Yes 5 83

time?
No 1 17

Unknown

Total 6 100

Do you believe the criteria required for Yes 4 67

the receivable collection by the bank is
No
reasonable?

Unknown 2 33

Total 6 100

Source: Questionnaires

3.5.1. Pre-requirements for granting loan/credits

This bank provides loan or credit services to staff members and customers whenever
the need arises. But is it obvious that the customer information should be evaluated
before credit or loan is granted to the borrowers. This branch also provides loan
services to the staff members. As the data collected and analyzed, it provide or allow
the staff members only 30% of their monthly salary to borrow. This amount is repaid
from their salary. The requirements to get loans/credit from are the following:

 The borrowers should have a request letter. The request letter of the borrowers
should include; amount, the type of business borrower engaged in, the way of
repayment of loan and source of finance for repayment.
 If the borrower is agency, borrower should present the profile of the
organization.
 The borrower should also have renewed trade licenses and tax clearance.
 In addition to the above requirements this bank also analyze
customers/borrower’s ability in terms of the traditional credit evaluation called
credit scoring named as 5Cs.Those are include:
i. Character: - As we get information from the respondents, the customer’s
character should be evaluated before grant credit/ loan to them. The bank
first analyzes the reputation of the customer/borrower. Up on agreement
borrowers should have willingness to meet credit obligation.
ii. Capacity: - Under this, the customer’s ability to meet credit obligation out
operating cash flow is also evaluated. Because the obligation should be met
from operating income, the ability of borrower to generate income is also
evaluated.
iii. Capital: - The borrower(s) should have financial standing which acts as a
guarantee of the borrower’s capacity to pay. The customer’s financial
services are also evaluated.
iv. Collateral: - The customer or borrower should to pledge assets which
served as a security in case of default. The type of assets to be pledged as
collateral depends upon the term and amount of the loan requested for
credit.
v. Condition: - this is the general economic condition in which the borrower
is going to operate in. this bank also consider the existing general economic
condition. For example during recession as the economy is declining the
 banks willingness to grant loan is very low. This is because there is a fear
of loan payment.

The respondent also demonstrated that the duration of time for which they grant loan
or credit depends up on the customer’s request and the type of business engaged in. As
per responses obtained this bank offer short term’ medium term and long term loan
depending on borrowers interest as much as the overall criteria fulfilled.

Term loan:- is a loan granted to customers to be repaid within a specific period of time
(up to five year)

Short term loan:- is a loan needed to bridge short term financial constrain (working
capita). The duration of short term loan does not exceed two years

Medium term loan: - is required by customers which are needed to bridge medium
term financial constraints. The duration of medium term loan does not exceed five
years but longer than two years.

The researchers also identified using questionnaire and interview that the techniques
they use to collect receivable are aging of receivables and the follow up process. The
branch also reports the loan amount three times a month to the home office. As
indicated from the above table 3.5., the majority or the entire respondent replied that
this banks receivable is recorded by the accountant of the branch. The majority of
them also demonstrated that, the branch collects its receivable on time. Only the
minority of respondent argued that the receivable of this branch is not collected
timely. From the above table 3.5., the majority of respondent said that the criteria for
collecting receivable of this bank are reasonable. Only the minority demonstrated, it is
not known whether or not the criteria are reasonable. The researchers also able to
understand that as there are strong and favorable criteria before granting loan,
collection of receivable when due is very simple.

3.5.2. The non performing loan

Table 3.6
 Items Option Response

Does this bank have a non performing loan Number %

(NPL)?
Yes

No 4 67

Unknown 2 33

Total 6 100

If your answer for the above question is yes;

how do you handle over this loan?
Qualitative response

What measure does this bank over the Qualitative response

defaulters of nonperforming loan?

Source: Questionnaires

As shown in the above table 3.6, the majority of respondent replied that this branch
have no non performing loan currently. The minority of them could not understand
that this branch have a non performing loan.

Although most business organizations use loan fund from banks properly, however,
few of them fail to this as a result of reinvesting the loan amount and lack of proper
feasibility study and other major and minor problems.

Researchers could able to understand from interview and questionnaire that this banks
procedure has fast and hard rule to reduce riskiness of nonperforming loan or loan
repayment. This is because they made maximum effort to identify profitability of
applicants by studying and analyzing the borrower’s application request.

Even though the procedure is hard and fast and demand increases but the
nonperforming loan (NPL) decreases or not existed currently.
As per the responses collected, Oromia international bank, Adama branch did not
encounter the non performing loan. Nevertheless; if the borrower fails to repay the
loan they go for the following procedure yet to collect the loan.

The default note is given by the bank for the borrower after the due date of the
obligation passed. Firstly, they try to negotiate with the borrower and even extend the
period if important. They also try to advice the borrower to repay the loan timely.
Then if the borrower fails to pay the loan, they wait for 90 days and contact the
borrower and advice to start the repayment.Finally, if the borrower could not pay the
loan, they replied they can close the property of the borrower which has been operated
even without the court decision and try to collect the loan amount in other ways.

The problem on this area is that, rarely few borrowers enter in to default, because, they
participate on areas of invested for which they have originally requested the loan. And
this sometimes leads to non performing loan.

CHAPTER FOUR

4. Summary, conclusion and Recommendation

4.1. Summary and conclusion

This research work was aimed at assessing the cash and receivables management of
Oromia international bank, Adama branch. The desired or intended data were gathered
from purposively selected staff members through interview, questionnaires and by
observation for primary data sources. The researchers have also visited the website of
the bank. For secondary data the researchers have collected data by reading deferent
documents such as manuals, annual reports, journals and others. The data gathered
were presented and analyzed mostly qualitatively.

From the analysis made the following findings were following;

 There are various sources of cash for this bank.

 The four main sources are :
 Checkable deposit(CD)
 Saving deposit accounts
 Fixed time deposit accounts(FTD) and
 Foreign currency deposit accounts.

 Checkable deposit account is operated through a negotiable check leaf.

 The minimum initial deposit required to open this account is 500 birr for
private individuals and 1000 birr for companies or association.
 Checkable deposit account is the lowest cost sources of cash for banks and it is
active type of deposit.
 Saving deposit accounts can be operated individually or jointly.
 The minimum initial deposit required to open saving account is birr 50.
 To sum up, in order to insure the due diligence and fulfilling the principle of
knowing your customers, the bank require documents such as valid Id card,
Passport size photographs and other relevant documents.
 FTD is a type deposit which is kept without movement for a certain period and
attracts higher interest rate than the prevailing saving deposit interest rate.
 The minimum period of accepting FTD is three months.
 The rate of interest rates on FTD various according to the duration and amount
of deposit.
 A foreign currency deposit account is a checking account denominated foreign
currencies opened by eligible non residents.
 To conclude, this bank use those funds raised in form of checkable, saving,
fixed time and foreign currency deposit accounts to make commercial
consumer and mortgage loan and to buy a government securities and bonds.
 The majority of the respondent replied that the bank wants to have neither excess
nor minimum, but optimum amount of cash on hand to going on its operations.
The minority of respondent responded that having excess cash is good for the
bank, which is not recommendable. This branch has its own optimum of cash
balance of birr three million to be maintained on hand, which is determined by the
head office. The implications of cash shortage and overage include:
 Cash shortage implies that there is no enough cash balances on
hand and thus it quit the operation,
 Cash overage implies the existence of excess or idle cash which
has no earning.

Whenever there is excess cash on hand, this branch deposit the idle at commercial
bank at its’ own issue account maintained at this bank. If the branch faces shortage of
cash unexpectedly it can withdraw from this account and if it does not have a enough
balance from this issue account, the branch request the head office to deliver the
required balance through telegraph or transport. The majority of respondents also
replied that there is no fraud of cash and receivable in this branch. The Oromia
international bank has commenced its’ operation with the help of in house developed
Orobank software (OBIS) in which all branches are networked by local area network
(LAN) and computerized.

 For its’ better internal control this branch uses various methods such as:
 General ledger
 Internal control by internal auditor
 Principles of internal controls
 Bank reconciliation and
 Petty cash fund
o This branch has controlling general ledger in which both debit and credit
balances of the daily transactions are proved.
o All the daily transactions are reviewed and checked by the internal auditor and
report is prepared for the manager.
o Tasks are segregated to each individual.
 o Pre-numbered documents are document is used to prevent the transactions not
to be recorded more than once.
o The independent internal control is also used in comparing accountability of
existing records.
o The duty of employee is rotated, which is designed to prevent employees from
any theft, since they will not able to permanently conceal their improper
actions.
o In general, this branch uses the principle of internal control to avoid or at least
to minimize fraud related to cash and receivables.
o The bank reconciliation is prepared monthly by the accountant of this branch.
o The branch also uses petty cash fund for small and miscellaneous expense.
o It has petty cash balance of birr 2000 which is determined by the home office.
o Petty cash is managed by petty cash custodian.

This branch can also grant loan to staff members, customers, etc. Some of the pre-
requirements the borrowers are expected to have include;

The borrowed should have a request letter to obtain loan.

If the borrower is an agency, the profile of organization is required.
This bank also take in to consideration the 5c’ of credit scoring to grant credit.

This bank uses aging of receivables to collect its’ receivables and the follow up
process.

 The majority respondents replied that this bank’ receivables is recorded by the
accountant of the branch.
 The branch also reports the loan amounts three times a month to the home
office.
 To summarize, the majority of the respondent demonstrated as shown in table
3.5 that the branch collects its receivables timely and without a loss.
The criteria for collecting receivables of this bank are also reasonable as the
researchers understood from the analysis made. Only the minority of respondent
replied that it is not known whether or not the collection criterion is reasonable.

The Oromia international bank, Adama branch did not encounter the non performing
loan) as responded by the majority. However, the bank has measures to be taken
whenever the borrowers fail to pay the loan amount and even can close the property
the borrowers without court decision and try to collect its’ receivables.

4.2. Recommendations

Based on the data presented, analyzed and the findings obtained from the research
work conducted on Oromia international bank, the researchers forwarded the
following recommendations concerning cash and receivable management;

 Currently, the major sources of cash for this bank is only deposits
(checkable, saving, fixed time and foreign currency deposits.) It looks
like due to this reason that; the optimal balance of cash fluctuates in
this branch. The researchers commented that the bank is better look for
another sources of cash such as non deposit borrowings, i.e. short term
in the form of issuing obligations in money market, net income retained
and sales of common stock as necessary.

 Although the branch has optimum cash balance to be maintained, this

balance sometimes shows fluctuation. Therefore, this branch is
recommended to revise the determination of optimum amount expected
to be maintained to make the balance stable.

 If there is excess Cash on hand, the branch is better to invest the idle
cash in attractive various short term investment opportunities ( money
market instruments such as T, bills) rather than simply depositing at
commercial bank which has no earning.
  Whenever the branch faces shortage of cash, the branch would rather
be able to restore the balance by itself rather than looking for the head
office being obeying to the rules and regulations of the head office.

 The branch is better separate clearly the activities of maintaining

receivables and payables accounts to avoid or minimizes fraud that
may be done as result of merging these two activities.

 If the borrower fails to pay the obligation up on the due date, the
branch gives the default note to the borrower which is appreciable and
it is advisable to be kept up.

 The bank should employ a proper follow up system from loan application
up to its collection of loan from customer to minimize or avoid the non
performing loan.

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