ASSESSMENT OF CASH MANAGEMENT PRACTICE IN

BANK
(A Case Study on Commercial Bank of Ethiopia
Harar branch)

A proposal Submitted to department of Accounting

and Finance for the Partial Fulfillment for the
requirement of the degree of bachelor of art (BA) in
Accounting and Finance

Prepared by: ID No:

1. Ahmednasir Mohammed 2286/08
2. Ahmed wako 2285/08

3. Lemlem Ayele 2356/08

Advisor: Mr. Shibiru B.

Haramaya University
College of Business and Economics
Department of Accounting and Finance

May, 2017

Haramaya, Ethiopia
 Abstract
This study will be conducted on the title of assessment of cash management
practice of Banks in case of Commercial Bank of Ethiopia at Harar branch
with primary objective of examining the cash management practice in Banks
at branch level. In this study both primary and secondary source of data will
be used and the researcher will be use open end and close questionnaires
and structured interview to collect data from the employee, customers and
management body of the institutions and will use convenience non
probability technique to select customers and census technique to select
target population among employee and management body of Commercial
Bank of Ethiopia at Harar Branch. And also the researcher will use
descriptive method of data analyzing.

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CHAPTER ONE
1. Introduction
1.1 Background of the Study

Cash management is a broad term that covers a number of functions that help individuals
and businesses process receipts and payments in an organized and efficient manner.
Administering cash assets today often makes use of a number of automated support
services offered by banks and other financial institutions. The range of cash management
services range from simple checkbook balancing to investing cash in bonds and other
types of securities to automated software that allows easy cash collection (Lawrence,
996:19).
When it comes to cash collections, there are a few popular ways that are recommended
today that can make the process of receiving payments from customers much easier.
Automated clearing houses make it possible to transact a business to business cash
transfer that deducts the payment from the customer account and deposits the funds in the
vendor account. Generally, this service is available for a fee at local banks (Lawrence,
996:19).
When it comes to investing cash, many banks offer the ability to transfer a fixed amount
of funds into mutual funds of other investments as part of the overall
Cash management strategy the automated debit allows the client to incrementally
increase the value of the corporate investment portfolio without having to spend a great
deal of time working through complicated investment strategies. There are a number of
cash management options offered by local banks. In some instances, the cost for the
services can be costly. However, many businesses find that the savings in time coupled
with the high degree of accuracy more than make up for the charges associated with cash
management support services (Louis, 1999:8).This study tries to assess the realities of
cash management practice in commercial bank of Ethiopia at Harar branch .
1.2 Background of the Organization
The State Bank of Ethiopia was established in 1942 with on objectives the duties of both
commercial and central bank is 1963 established as Share Company to take over the
commercial banking activities of the state bank of Ethiopia. In the 1974 revolution,
commercial Bank of Ethiopia got its strength by emerging with privately own Addis
Ababa Bank. The Commercial Bank of Ethiopia which is striving to embark in to world
class commercial bank hindering the state of the art and reliable service to its
millions of customers both locally and abroad. The business strategy of the bank focuses
in the stake holders its services.
On April 30, year 2011 the number of branches reached 364 stretches across the length
breadth of the country. CBE combines a wide capital base with more than 9700 talented
and committed employees. In 2011 whom it regard as its key asset for employees. In
2011 whom it regard as its key asses for banking development. The state owned
commercial bank of Ethiopia still dominates the market in terms of asset capital and
customer base and Branch Network. This makes it one of the most reliable and strong
commercial Bank in the country and the region. Its strong capital base above 67 years of
rich experience in the market and large branch network through the country enable the
bank to accommodate large demand for banking service, Bank from private and public
companies and to increase its overall revenue on sustainable base the fundamental
component of our mission statement includes customers. These are the most important
asset we continuously revise our attitude towards the customers with the view to
securing.
1.3 Statement of the Problem
Cash is the most important element of banks day today activity. By effective cash
management banks can reduce the excess cash at optimum level and ensure customers
requirements. Cash management involves neither excess not deficit amount of cash on
hand at right time proper cash management requires that the bank know how much cash
is need as well as how much it has and where that cash is at all time. (Planket 1986).
Cash is sensitive assets that require proper control and attention because these assets are
easily spendable and highly subject to theft. The management of cash generally center on
forecasting and internal controls. The responsibility of management with respect to cash
is to assure that there is sufficient cash to carry on the operations, to invest idle cash and
to prevent loss of cash due to theft or misappropriation, John (1999).
Proper cash control mechanisms are necessary to assure that cash is used for proper
business purpose and not wasted, misused or stolen. Management is responsible for
controlling and processing issues such as vault cash, and idle cashes of the company in
this regard.

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Commercial bank of Ethiopia is reputable to perform various activities such as advancing
loan, accepting deposit, creating credit, promoting public to save more and the like. In
operating those all activities proper cash management is the crucial one. It is indisputable
fact that cash management practice may face problems because cash is most liquid asset,
greater temptation for cheating and high risky account in its nature. Problems arise in
supervising its cash flow, inspecting the cash position and in maximizing interest earning
on investments. Therefore, after observing study made by previous researcher the present
researcher have pointed out the following research gaps that are not evaluated by prior
these are internal cash control over cash payment and cash control system designed and
implemented in the bank. Thus this study tried to investigate a solution for the following
basic research questions.

1. What strategies are developed by the organization for cash management?

2. What procedures are followed by the organization for cash collection and
disbursement?

3. How the organization could manage the surplus and deficit of cash

1.4 Objective of Study

1.4.1 General Objectives
The major objective of the study is to assess the cash m management practices of CBE at
Harar city.
1.4.2 Specific Objectives
In addition the above mentioned general objective the study has the following specific
objectives.
1. To study the cash management strategies that is designed by the CBE
2. To identify the cash management procedures followed by CBE for cash collection
and disbursement
3. To see how the CBE manage its surplus and deficit of cash

1.5 Significance of the Study

This particular research is expected to offer the following purposes. It is expected that the
findings of this research will give value to the researchers in case of developing research
experience to solve particular problem. Moreover, the findings of this research will serve
as a source of reference for future research and help the company to take corrective
action on the basis of suggested solutions or recommendation.
1.6 Scope of the Study
The study will carry out in commercial bank of Ethiopia specifically at Harar city. This
branch will choose because of its convenience to researcher. Because of no sufficient
time and no enough budgets to conduct study on wide area the study will limit in
commercial bank of Ethiopia at Harar branch geographically.
1.7 Limitation of the Study
During the collection of data for this study purpose the researcher might face different
limitation, such as involuntariness of the concerned people to give the information.
1.8 Organization of the Study
This study paper will be arranged in five chapters. The first chapter deals with the
introductory part mainly about back ground of the organization, statement of the problem,
objectives of the study, significance of the study, scope of the study, limitation of the
study and organization of the paper. The second chapter will contains literature review on
cash management practice. The third chapter, contain methodology of the study. The
fourth chapter contains data analysis and interpretation. Finally, the last chapter will
provide summary, conclusion, and recommendation.

CHAPTER TWO
2. Literature Review
2.1 Cash Management
Definition of cash: - cash is a medium of exchange that a bank will accept that a bank
will accept for deposit and immediate credit to the depositor account. Cash is any
medium of exchange that a bank will accept of face value which includes bank deposits,
currency, coins, bank draft and money order.
Definition of management: - is a process of setting organizing and achieving of a given
management basic functions which as planning, organizing, controlling and directing that
utilize human, financial and material resources. Management is a process by which
under taken by one or more persons to achieve the stated goals (Planket,1986).
Definition of Cash management! - Strategy by which accompany administer and invest
its idle cash. Cash management is concerned with the managing of cash balance held by
the bank for liquidity purpose and investing idle cash. Cash management is managing the

6
cash properly to maintain the profitability of cash excess and to minimize the cash
shortage risk. Cash management is generally cantered on forecasting and internal
control. Cash management is importance for any business enterprise because cash a
means of acquiring goods and services. The management of a cash is necessary since
cash constitute the smallest portion of asset but it needs considerable time devotion for
managing due to is nature of easily misappropriates in order to solve uncertainty about
cash inflow and out flow and also lack of balance between cash receipt
And disbursement, the firm should develop appropriate strategies for cash management.
Some of the cash management strategies are the following:-
Cash planning: - Cash inflow and out flow should be planning to protect cash surplus or
deficit for each period of the planning period. Cash beget should be prepared for this
purpose.
Management the cash flow: - the flow cash should be properly managed the cash out flow
should be decelerated and in flow relatively increase.
Optimum cash level: - The firm should be deciding about the appropriate level of cash
balances. The excess cash and cash deficit should be matched to determine the optimum
level of cash balances.
Investing surplus Cash:-The surplus cash balances should be properly invested to earn
profits. The firm (bank) should decide about the division of cash balance between
alternative short term investments such as bank deposits market securities. The idle cash
management should be depend on the firm product, competition etc.
Cash is the most liquid asset and the standard medium of exchange and the basic for
measuring and accounting for all other items. Cash is important current asset for
operation of a business. It is the basic impute needed to keep the business running on
continuous basic. It also the ultimate output expected to be realized after services is
delivered. To be reportable as such it must be readily available for the payments of
current obligation and it must be free from any contractual restrictions that limit its use in
satisfying debts. In accounting cash consists of coin, currency and available found on
deposit and the bank negotiable instruments such as money order, certified cheque
personal
And bank drafts are also viewed as cash. Saving account usually classified as cash
although the bank has the lead light notice is rarely demanded by banks saving account
are considered as cash (keiso.etal, 2001)
2.2 Controls over Cash
Due to its easily transferability, cash is the asset most likely to be used by employees and
manages. Cash is also vulnerable to theft since many transactions either directly or
indirectly affects the receipt or payment of cash. The objective of internal control over
cash is to be providing accurate information about cash. To avoid cash shortage and
excess (idle) cash and protect cash from theft and misappropriation use. To control cash
receipt the firm, should record the cash receipt properly and immediately deposit the cash
receipt amount.
2.3 Cash Planning/budgeting /
Cash planning is a technique to plan and control the use of cash. It protects the firm by
developing a projected cash management from forces of exacted cash inflows and
outflows for a given period. Cash beget is a planning tool that helps the management of
the business in making important decision. It is a schedule of expected cash payment and
cash receipts. It results the effect on the cash position at a given level of operations.
Therefore caste may be based on the present operation or the anticipated future
operations. Cash planning in very important in developing overall operating plant firm of
them. The cash planning (budgeting) may be done on monthly quarterly or yearly basis.
The period and frequency of cash planning generally depend on the size of the firm and
philosophy of management, cash budget is a set of formal
(Written) statement of management’s expectation regarding sales expenses production
volume and various financial transactions of the firm for the coming period. Cash budget
consider as a standard at the end of the period and serve as a control devices to help
management measure the firm performance may be improved. Cash budget helps to
identify periods of cash surpluses. It also help the financial manager to measure the
amount and duration of cash shortage and to prepare repayments schedule and it there is.
Cash budget helps to prepare prepayments schedule and it there is cash shortage to
finance with borrowed funds (college Accounting, )
Advantages of Cash budgeting
Cash budget estimates the occurrence, amount and duration of cost and payment schedule
for any needed financing.

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Is an important tool for planning and controlling because forecasted error can be traced to
the individual components of the cash budget?
Important for forecast of occurrence amount and duration of cash level overhand above
the minimum desired end of month cash balances.
Serves as an integrative analytical tool for co operation of the individual components of
that produce cash budget inflows and out flows are brought together and their overall
impact on cash flow can be estimated (Nvel, e 1985 )
2.4 Cash Controlling
Proper internal control of cash mechanisms provide management with reasonable
assurance that intended safeguard is being practiced consistently. Due to it’s easily
exposed to theft and misuse special control should be need for any organization. For the
effective of cash control in an organization the following cash control method can be
used as cash control principle and standards.
2.4.1 Segregation of Duties
Represent for each work different employees in order to create for each employees
responsibilities and assures that one person is not made bias. For this purpose the
following function should be segregated in order to maintain a proper segregation of
duties.
Record Keeping Functions
Creating and maintain department records such as processing and posting transactions
and cash register recording for select transactions manually and preparing cash receipt
backups (Craig 1988).
Authorization function
Reviewing and approving of transaction example approving invoice, refunds and other
correcting entries, approving cash transfers and movement of assets should be authorized
by the management the organization or the responsible person.
Reconciliation function
Assurance that transactions are properly taken place it is present at a supervisory level or
by accounting office. Example comparing funds collected to the account receivable
posting comparing collections to deposits and comparing departmental records of revenue
to the general ledgers.
2.4.2 Accountability
Proper accountability is present when an asset (cash) and all cash handling activities and
accounted for properly documented and traceable to specific cash handle. The following
functions should be performed in order to maintain a proper accountability structure.
Individual Accountability
Proper delegation of authority and responsibility means that knowing who has access to
an asset and why they access. It represent when transaction are identified to a person,
individual cash drawers areas signed to each handless and separate password are severed.
Cash accountability
Proper securing means knowing where asset can is at all times it presents when all funds
remain properly secured receipt are given to each and every customer and keys and ward
are secured.
Process accountability
Proper documentation means knowing what was accrued from beginning of a process to
end of a process it is resent then all transfers are well document and receipt are properly
prepared and secured (craig, 1988
Security monitor
Means that the safety of and transport of assets are taken in its consideration and follow
up proper protocols and procedures. It’s present when tow people are involved in
handling cash, asses one properly and transported.
Transaction recording
Transaction is correct and the appropriate back up is maintained. It is present when daily
receipts are reconciled to the cash register totals and the receipts collected. Authorization
and approval: - means that the proper supervisor and managing review and approve
transaction. It is present when receipt issued are reconciled and when receipt issued are
reconciled and when surrey cash counts are performed are performed on at least annual
basis or turn over exists.
2.5 Reasons of holding cash
Banks maintain on inventory of currency to satisfy its objectives. Primarily to meet the
daily currency demands of deposition, either at teller windows or author mated teller
machine. It the bank know with certainly the daily flow currency from deposits and with
drawers, the amount of cash required could be determine clearly. If there were on costs
associated with shipments currency backs should reduce their holding of cash and
increase the frequency of currency shipments. Secondly, regularly agency mandate legal

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reserve requirements that can be meet only by holding qualifying cash asset. Thirdly,
bonks serve as a clearing house for nations checks payment system, each banks must hold
sufficient balance at financial institutions so that check written by its depositors will clear
when presented for payments. Banks use cash balances as to purchase service from
correspondent bank (timothy etal. 1995)
2.6 Investments of surplus (idle) cash
Investment is the alterative in order to mange properly the idle or surplus cash. Banks are
one financial institution which hold surplus of cash for short of time and wish to earn at
least some return on temporally idle cash. The primary function of a bank is to act as a
depository for its customers Funds to meet the credit needs for its services area. The
excess amount of cash hold by firm to meet its variable cash requirements and future
contingencies should be temporarily sales in a national bank up sources of liquidity to
meet these uncertainty flows.
Investing idle cash has two primary functions. First it is a major source of getting earning
and the other function Is to provide for the banks liquidity need that is expected or
unexpected a cash needs. Investment of temporarily idle cash in selected type of
marketable securities is a key element of good financial management. The following are
example dhort term money market instrument like treasury bills commercial paper,
certificate of deposit bank deposit (rose Stephen, 1995)

Cash management
Company’s level of liquidity, management of cash balance and short-term strategies
.Pindado(2004) also defines cash management as part of working capital that makes up
the optimal level needed by a company. Borty (2004) noted that, cash management is of
importance for both new and growing businesses. Companies may suffer from cash flow
problems because of lack of margin of safety in case of anticipated expenses such that
they experience problems in finding the funds for innovation or expansion. Weak cash
flow makes it difficult to hire and retain good employees (Beranek, 2000).Ross (2000)
says that, it is only natural that major business expenses are incurred in the production of
goods or the provision of services. In most cases, a business incurs such expenses before
the corresponding payment is received from customers. In addition,
Employee salaries and other expenses drain Considerable funds from most business.
These make effective cash management an essential part of the business financial
planning. According to Bort (2004)
Cash is the lifeblood of the business. The key to successful cash management lies in
tabulating realistic projections, monitoring collections and disbursements, establishing
effective billing and collection measures, and adhering to budgetary parameters because
cash flow can be a problem to the business organization.
Cash collections
According to Ross (2000), cash collection is a function of accounts receivable, it is the
recovery of cash from a business or individual with which the company is issued an
invoice. Gitman (2008) and Vanhorne (2001), offer theoretical positions drawn from their
observations and consulting experience on the fact that a firm can improve its cash
management efficiency by collecting accounts receivable as soon as possible. The most
obvious way of bringing forward cash inflows, would be to press debtors for earlier
payment although this policy will result in goodwill and problems with customers
(Palom, 2001).There will be very little scope for speeding up payments when the credit
period currently allowed to debtors is no more than the norm for the industry. Myers
(2004) defend the idea put forward by Palom (2001) and indicating that it might be
possible to encourage debtors to pay more quickly by offering discounts for earlier
payment. In order to improve cash management efficiency and enable more availability
of cash the company can use this as an alternative solution. The objective of managing
accounts receivable is to collect accounts receivable as quickly as possible without losing
sales from high pressure collection techniques (Gitman, 2008).
Cash collection techniques
According to Gitman (2008), there are four cash collection techniques namely letters,
telephone calls, personal visits and legal action. Letters are written communication of
expressions, opinions and communication recorder for later reference (Palom,
2001). after a certain number of days, the firm sends a polite letter reminding the
customer of the overdue accounts. If the account is not paid within a certain period
After this letter has been sent a second more demanding letter is sent. A telephone call is
a connection established over a telephone network between two parties (Chastain,
2008). If letters prove unsuccessful, a telephone call may be made to the customer to
request immediate payment. If a customer has a reasonable excuse, arrangements May be
made to extend the payment period. Personal Visits involves sending the credit controller
to confront the customer and this can be very effective. Payment can be made on spot.

12
Legal action is a judicial proceeding brought by one party against the other for a wrong
doing (Davidson, 1992). Legal action is the more stringent step,
An alternative to the use of a collection agency
Sensitivity of cash flow forecasts to changes in estimates of sales, costs and could be
analyzed by planning for different eventualities management should be able to
Prepare contingency measures in advance and also appreciate the key factors in the cash
budget. Knowledge of the probability distribution of possible outcomes for the cash
position, will allow a more accurate estimate to be made of the minimum. Palom (2001),
advocate the use of a probability distribution of possible outcomes for the
Cash position to allow a more accurate estimate of the cash budgets hence making it
possible to turn around the cash management problem.

2.7. EMPIRICAL REVIEW OF THE STUDY

Study made BY mesert (2013), indicates that the cash management practice of Nibe
international bank has been found to be poor in some instances. Thus, even though it has
a procedure that is written about the cash management practice, it has not been
communicated adequately; duties have not been adequately segregated. • Finally the bank
has poor control over vault cash, where vault cash not adequately managed, excess cash
and shortage is not kept checked continuously leaving the cash to be misused and further
aggravating customer complaints due to long waiting hours..

CHAPTER THREE

3. Research methodology

3.1 The research Design

The study will focuses on the assessment of cash management practice of commercial
Bank of Ethiopia at Harar branch. The study will use both qualitative and quantitative
research approaches in order to achieve the research objective.

3.2 Source of data

In order to get sufficient and relevant information for the study the researcher will use
both primary and secondary data. The primary data will be collected from customers,
employees of the institution and management on the current situation of the institutions
and performance of employee and secondary data will be collected from books, manuals
and reports.

3.3 Sample techniques and sample size

For data collection the researcher will use the judgmental sampling method due to
specific needs of the topics which required people where directly involved in the cash
management practice of the Bank and who are also available at the time of carrying out
the research.

3.4 Method of data collection

Primary data will be collected by using open- end questions using structural interview
from mangers because, to get relevant data and by using questioners from customers and
employees. In the questioners, the researcher will use both close- end and in such way
that they should generate important information on cash management practice of
commercial Bank of Ethiopia of Harar Branch.

3.5 Method of data processing

The process will, be carried out in clear way to reach the objective of the study after the
necessary primary and secondary data have been collected and would be started by
editing and classifying the collected data to more meaning full and relevant data. Editing
means the process of examining the collected data would be Identify error and omission
and to correct them regarding data classification, the collected data will be arranged and
grouped in to similar category.

3.6 Method of data analysis

The collected data will be analyzed by using descriptive analysis method accordingly,
percentage and frequency count will be analyzed and the data collected from the sample
respondent will be interpreted.

3.7 Time and cost budget

3.7.1 Time budget
In order to completed the overall research project it needs time budget the table given
below is shows time plan that will be under taken in the research according to the time
requirement.

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No Activities March 2017 April 2017 May 2017

1 Title selection XX

2 Proposal writing XX

3 Communication with XX
organization
4 Data collection XX

5 Data organizing and XX

analyzing
6 Draft report writing XX

7 Final report writing XX

8 Defense XX

3.7.2 Budget schedule

No Item Unit Quantity Unit Total

price price
1 Stationary cost
Printing paper Pkt 1 50 50

Photo copy paper Sheet 100 0.50 50

Pen Number 5 10 50
2 Personal cost
Internet service Minute 150 3 450
Transportation cost Km 20
Sub-total 620
Contingency 10% 62
 Total 682

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