MANAGEMENT OF

INCOME,

PROFIT, RESERVES

AND SURPLUS

Income Management

What Is Income Management ?

Its Aims.

How Does It Work?

Income Management Funds.

Income Management

Income management is a budgeting tool that can help people pay for essentials like food, rent, clothing, health care, utility bills and school expenses, for the benefit of themselves and their children.

Income management directs part of a person’s income support and family assistance payments towards essential items. Income managed funds cannot be spent on alcohol, tobacco and gambling products.

When combined with other support services such as financial counselling, money management education and/or health and wellbeing services, income management can be an effective, short-term way of building someone’s confidence in meeting their family’s most important needs.

Its Aims

It ensures income support payments are spent in the best interests of children and families, and helps ease immediate financial stress.

Income management aims to:

ensure that priority needs of the individual, their children and other dependents are met

strengthen participants' financial capability and skills to reduce risk of hardship and crisis

provide stability to enable disadvantaged people to better engage with the community, employment and education

promote socially responsible behaviour, particularly in relation to children

reduce the amount of funds available to be spent on excluded goods, including alcohol, home brew kits, home brew concentrates, tobacco products, pornographic material and gambling goods and activities.

Aims(cntd.)

Income management can help ensure that:

money paid by the government for the benefit of children is directed to the priority needs of children

the amount of cash available to vulnerable individuals is reduced to help counter substance abuse, gambling and other anti-social behaviours that can lead to child abuse and community dysfunction

people are provided with the tools to stabilise their lives, so they can care for their children, and join or return to the workforce.

How Does It Work?

Income management does not change the amount of payments a person receives. It just changes the way that they receive part of their payment. People participating in income management receive the balance of their payments in the usual way.

Income management works by ensuring that part of the person’s payment is allocated to pay for priority items such as food, housing, clothing, utilities, education and medical care. Centrelink assists people on income management to identify their expenses and helps them adjust their allocations as required.  

Income management limits expenditure of income support payments on excluded items, including alcohol, tobacco, gambling goods and activities. There is no restriction on how a person can use the proportion of their payments that are not income managed.

Income Managed Funds

The BasicsCard is a stored value card issued by DHS to eligible income managed people.

Basic Card helps people on income management access income managed funds at approved merchants

helps provide access to priority goods and services for income managed people

restricts access to excluded goods and services for income managed people.

It is PIN-protected and processed through the existing Electronic Funds Transfer at Point of Sale (EFTPOS) network

Income Managed Funds(Cntd..) Payments direct to businesses Centrelink is able to make payments direct to a business through an

agreement between the business and Centrelink (Schedule 4 or Schedule 5 contract). This enables people to use their income managed funds for services such as utilities and rent, or to direct funds to businesses that do not accept the BasicsCard, such as stores that do not use EFTPOS. 

A Schedule 4 Income Management Deduction Agreement is a contract between an approved service provider and Centrelink. It enables Centrelink to make payments on behalf of people on income management to service providers where the person has an ongoing relationship, such as housing authorities or child care providers.

A Schedule 5 Income Management Deduction Agreement is a contract between an approved business and Centrelink which enables a business to receive and hold funds in an account for an income managed person. These funds can be used by the income managed person to shop at the store.

Centrelink is also able to make payments directly to non-approved businesses with a one-off transaction on request.

Profit Management

Revenue collection is always the backbone of all that goes around in every business. Though this is the case, if you do not manage this revenue properly, your business profits will always be a thing of the past. You will always be incurring losses all through. Therefore if you need a business that has got great profits, there is the need to always consider these tips and strategies especially in managing your business profits.

Ways To Manage Profit… 1. Sales increase Though the huge profits that your business is experiencing, it is

important to also increase your business sales. This will help you to able to meet all the other expenses that your business profit needs to cater for. It is your sole responsibilities to always make sure that these sales are therefore increased in any way possible.

 

2. Reducing your business expenses Reducing your business expenses has always been the proper way

to always manage your business profits. This should be based to all the operating costs that you incur in your business especially when offering services. This also applies when you are selling both the finished and semi-finished products to your clients.

 

3. Managing your customer relationship Your customers are the main contributors to your business profits.

For this reason, managing your relationship with them should always be your responsibility especially if you want to maximize your business revenues. This management is also important for maintaining your clientele thus increasing your market shares. Many people have no idea about this trick and if they have, they always tend to forget that its importance in their business.

 

Ways To Manage Profit(cntd.) 4. Automating your revenue management Though this strategy for your business profit management may seem difficult

and challenging for some businesses, it is one of the best when it comes to managing your revenues and business profits. The idea behind this automation is to always increase the speed in term of how your business staffs processes payment for the various customers that purchase items in your company or business. This has great influence on how your business is able to maximize its revenue collection after a short period.

 

5. Analyzing your business profit and reporting Different businesses operate differently. For this reason, if your business is a

partnership type of business, you need to always emphasize the need for sound and appropriate methods when it comes analyzing and reporting the profits made. This tip is beneficial especially when it comes to sharing of the profits and also making sound steps to help the business move in the next level. This will also be helpful when it comes to appropriate planning for all your business activities that will increase the growth and profits for your business. 

  To be able to achieve all these strategies, good management and leadership

should be put in place. This management happens to be the backbone of all businesses that strives through the challenges that are always experienced in most of the businesses in the current world markets. Therefore if you really need to see the fruits of your business and leap good profits, you need to always emphasize the needs for these tips and strategies.

 

What Are Reserves?

The funds that are earmarked by a firm from its retained earnings for future use, such as for the payment of likely-to-be-incurred bad debts. The existence of such a reserve informs readers of the firm's financial statements that at least a part of the retained earnings will not be available to the stockholders. See also allowance for doubtful accounts, reserve for contingencies.

Purpose Of Reserves

Helpful in meeting the unforeseen liability or loss.

Reserves are undistributed or accumulated profits. It is a source of internal financing of business.Incase the reserves had not been maintained the profit would have been distributed as dividend among shareholders.

Equalisation of dividends over the years. To provide funds for meeting a specific

liability.

How Much Money Should a Company Have In Cash Reserves?

While concepts such as profit margins, assets and financial risk are important to any business owner, developing an understanding of the term cash reserves is equally as important. Without cash reserves, a business owner may be ill-equipped to handle unexpected or emergency expenses.

How Much Money Should a Company Have In Cash Reserves?(cntd..)

Understanding Liquidity

In order for a business owner to decide on the amount of cash reserves the company needs, he must understand how cash reserves factors into liquidity. Liquidity refers to the total amount of cash a business has available, including lines of credit. How liquidity is managed can often determine whether a business remains open. Important factors in managing liquidity include determining cash reserves based on fluctuations in daily cash flow; unplanned events, such as emergency equipment repair; and potential opportunities, which can include marketing and investment opportunities. These and other similar scenarios should factor into how much is set aside in cash reserves.

How Much Money Should a Company Have In Cash Reserves?(cntd..) A Closer Look Setting aside cash reserves for cash flow fluctuation

should take into account cash balance trends for highs and lows in expenses and income. Adding between 15 percent and 50 percent to account for cash balance variations is advisable. Additionally, making a list of possible unplanned and events and emergencies along with figuring out the financial impact they could have can assist in knowing how much you need to accumulate in cash reserves.

Planning for the Future In some cases, a business may need to hire new staff

members or launch an aggressive marketing campaign. These are the potential opportunities that having cash reserves would serve. Setting aside cash reserves for the initial costs can be help to begin these initiatives while continuing to raise additional funds.

What Is Surplus?

  a. an excess of total assets over total liabilities

b. an excess of actual net assets over the nominal value of capital stock.

Surplus Management

Definition

The technique of managing the funds of a company or financial institution with the aim of earning a return  on the available assets and creating more assets than liabilities (surplus) also called asset/liability management.

Concept Of Surplus Management

There are different views regarding the meaning and concept of surplus in financial management. According to one school of thought, the balance remaining after deducting the liabilities and share capital from the total of assets is known as ‘surplus‘. In the opinion of the other school, ‘surplus‘ represents the ‘undistributed earnings’ of a company, i.e., the balance of profits remaining after paying dividends to the shareholders. Still, there are others in whose opinion ‘surplus‘ is a left over which represents an addition to assets that is carried over on the ‘equity side’. But, surplus is solely equity of stock-holders and not an asset in any sense of the word.

Surplus is considered to be a sort of a blanket covering of many corporate purposes. It is not merely a source of dividend, but has various other functions as well. It is regarded as a welcome sign by the management. It reflects upon the sound earning capacity of a firm. It enables a company to follow a stable dividend policy. A company can pay stable dividends even in the years when there are no sufficient profits. Surplus acts as a cushion to absorb the shocks of economy and business such as depression for the company.

Types & Sources Of SurplusThe various kinds of surplus and their sources are discussed as below:

Earned surplus. In the mind of a layman, surplus always implies earned surplus. The use of the term surplus as accumulation of past earnings accounts for its common identification with earned surplus. The main sources of earned surplus are: past accumulated profits; net profits from business operations at the close of each financial year; retained earnings including income from business operations as well as non-

operational incomes, such as profit on sale of fixed assets ; conversion of reserves which are no longer required; and non-operating income.

Capital surplus. Capital surplus is that part of the surplus which is not related directly to the operating results of the business. It results from: an increase in assets without a corresponding increase in liability or capital;

and a decrease in capital or liabilities without a corresponding decrease in assets.

Surplus from unrealized appreciation of asset. During periods of prosperity or boom, the value of fixed assets may increase or intangible values may be added by accounting entries. Such a surplus is not realized because the assets are not actually sold but the effect of an appreciated surplus is created when a company appreciates its assets.

Types & Sources Of Surplus(cntd.)

Surplus from realized appreciation of asset. The sale of assets at prices in excess of book values may result in realized surplus.

Surplus from mergers, consolidations and reorganizations.  In mergers and consolidations, stock may be exchanged for stock and surpluses taken over by the new companies. Since mergers and consolidations are generally accompanied by an upward valuation of assets, the resulting surplus may be larger than the total of that resulting in an increase in surplus. Even unsuccessful companies may increase their book surplus through a forced reduction in liabilities.

Surplus from reduction of share capital. In periods of adversity, companies may create a surplus by reducing the liability of their stated capital. This process of creating a surplus involves a number of legal formalities and a sanction of the creditors.

Surplus from secret reserves. A secret reserve is one which is not disclosed in the balance sheet. This method of creating a surplus is not encouraged because it does not represent a true and fair view of the company’s financial position and provides an opportunity to the management for manipulation and misuse of the company’s funds. Such a reserve may be created by: an understatement of income; an excessive depreciation; inflation of capital expenditure; an undervaluation of assets; and an overstatement of liabilities.

Paid-in surplus. It arises from the issue of shares at premium.

Uses Of SurplusSurplus may be broadly classified as (i) earned surplus; and (ii)

capital surplus. The uses of surplus have been discussed below keeping in mind such classification:

Uses of Earned Surplus: The accumulated earned surplus can be utilized by the company for the following: reducing the value of fixed and working capital ; writing off intangible assets, such as, goodwill, preliminary expenses,

etc. equalizing the rate of dividend; financing schemes of expansion and growth ; absorbing the shocks of business cycles; and supplementing other reserves.

Uses of Capital Surplus: Capital surplus may be used for the following purposes: for expansion and growth ; for protecting investments against a decline in values. for providing funds for working capital ; for writing down of operating losses; for absorbing depreciation.

Creation Of Surplus Surplus can be created by the following methods:

1. Understatement of liabilities, by: omission of certain liabilities ; providing inadequate depreciation; and providing insufficient taxes.

2. Overstatement of assets, by: over-valuation of certain assets, such as

inventories; considering unrealized profits; not making a provision for bad and doubtful

debts ;          not taking into account the loss or shrinkage in the

value of an asset

Hiding Of Surplus Sometimes the companies hide their surplus for the various

reasons, such as: To prevent the shareholders from demanding the distribution of

surplus; To induce investors to sell their shareholdings to the

management at less than its true value; To preserve the management from the temptation of paying

large dividend; To save heavy taxation;  To prevent competitors; To delay payments to creditors by impressing upon them their

inability to pay immediately Undervaluation of assets by :

charging excessive depreciation; charging capital expenses as revenue; writing off assets by charging against surplus.

Overstatement of liabilities by : showing a contingent liability as an actual liability ; use of fictitious liabilities; and providing excessive provision for taxation, etc.