Submitted To Ms.

Mamta Bharadwaj (Lecturer)

Submitted By Anu Nain Roll No -16 7th Sem.

INSTITUTE OF MANAGEMENT STUDIES

The basic objectives of cash management are two fold;

Meeting Payment Schedule

Minimizing Funds committed to Cash Balances

 Synchronization
Short

of Cash flows.

Costs. Excess Cash Balance Costs. Procurement and Management. Uncertainty and Cash Management.

Cash Management Models

Cash Budget

Baumol Model Miller-Orr Model

Planning horizon Operating cash flows Financial cash flows

The purpose of this model is to determine the minimum cost amount of cash that a financial manager can obtain by converting securities into cash considering :1. Conversion Cost 2. Opportunity Cost

Conversion costs (Tb/C)

Total Cost associated with Cash Mgt. i(C/2) + (Tb/C)

Opportunity cost i(C/2)

Baumol model is a model that provides for cost efficient transactional balances and assumes that the demand for cash can be predicted with certainty and determines the optimal conversion size. Optimal conversion size/ Amount It is the cost of minimizing quantity in which to convert marketable securities to cash or cash to marketable securities. C = 2bT/i

MO model is a model that provides for costefficient transactional balances and assumes uncertain cash flows and determines an upper limit and return point for cash balances. Symbolically, C=bE(N)/t +iE(M) where C= total cash mgt. cost b= fixed cost per conversion E(N)= expected no. of conversion E(M)= expected avg. daily cash balance t= no. of days in the period i= lost opportunity cost

MO Model assumes that cash balances randomly fluctuate between an upper bound (h) and a lower bound (o). When the cash balances hit the upper bound, the firm has too much cash and should buy enough marketable securities to bring the cash balances back to the optimal bound (z). When cash balances hit lower bound, the financial manager must return them to the optimal bound (z) by converting securities into cash.

z = 3br/4i where r = variance of the daily changes in cash balance

Upper limit/bound (h)= 3z.

BAUMOL MODEL
1. The focus of Baumol model is to minimize total cost associated with cash mgt. 2. Model assumes constant and certain pattern of cash flows. 3. Less realistic. 4. Uniform & certain optimal cash balances.

MILLER-ORR MODEL
1. Objective of MO model is to determine optimal cash balance level which minimize the cost of cash mgt. 2. It assumes uncertain cash flows. 3. More realistic. 4. Cash balances randomly fluctuate between upper & lower limit.

It is a statement of the inflows and outflows of cash that is used to estimate its shortterm requirements

ELEMENTS

Planning horizon

Operating Financial cash cash flows flows

INFLOWS/ CASH RECEIPTS

1. Cash sales 2. Collection of accounts receivables 3. Disposal of fixed assets

OUTFLOWS/ DISBURSEMENTS
1. Accounts payable 2. Purchase of raw material 3. Wages &salary 4. Factory expenses 5. Administrative & selling expenses 6. Maintenance expenses 7. Purchase of fixed assets

CASH INFLOWS/ RECEIPTS

1. Loans borrowings 2. Sales of securities 3. Interest received 4. Dividend received 5. Rent received 6. Refund of tax 7. Issue of new shares and securities

CASH OUTFLOWS/ PAYMENTS

1. Tax payments 2. Redemption of loan 3. Repurchase of shares 4. Interest paid 5. Dividend paid