[Latest News][6]

Affiliate Marketing Guides
Agriculture Business Ideas
Amazon Online Store Tips
Banking & Finance Tips
Blogging & Webmaster Guides
Bulk SMS Short Code Guides
Computer & IT Business Ideas
Education Business Ideas
Entrepreneurship Tips & Freebies
Facebook Autopilot & Tips
Fashion & Decoration Ideas
Financial Calculators
Fiverr Income Guides
Free SMS Text Messages
Google Adsense Tips
Health Business Opportunities
Inspirational Poems & Literature
Insurance & Risk Management
Job Search Tips
Mobile Phone Tips & Business
Motivational Quotes & Tips
Oil & Gas Business Ideas
Online Business Guides
Online Importation Business Guides
Small Scale Business Ideas
Social Media Income Guides
Start-Up Business Ideas
Transportation & Haulage Ideas
Web & Graphic Designing Ideas
Work-At-Home Business Ideas

Cash Management Models

Cash Management Models

Cash management models analyse methods which provide certain framework as to how the cash management is conducted in the firm. Cash management models are the development of the theoretical concepts into analytical approaches with the mathematical applications. There are three cash management models which are very popular in the field of finance.

[Post Image Courtesy of IdeaGo at FreeDigitalPhotos.net]

1. Baumol model

The basic objective of the Baumol model is to determine the minimum cost amount of cash conversion and the lost opportunity cost. It is a model that provides for cost efficient transactional balances and assumes that the demand for cash can be predicated with certainty and determines the optimal conversion size. Total conversion cost per period can be calculated with the help of the following formula:

t = Tb/C


T = Total transaction cash needs for the period

b = Cost per conversion

C = Value of marketable securities

Opportunity cost can be calculated with the help of the following formula;

i = C/2


i = interest rate earned

C/2 = Average cash balance

Optimal cash conversion can be calculated with the help of the following formula;

C = V2bT/i


C = Optimal conversion amount

b = Cost of conversion into cash per lot or transaction

T = Projected cash requirement

i = interest rate earned

2. Miller-Orr model

This model was suggested by Miller Orr. This model is to determine the optimum cash balance level which minimises the cost of management of cash. Miller-Orr Model can be calculated with the help of the following formula;

C = [bE (N)/t] + [iE (M)]


C = Total cost of cash management

b = fixed cost per conversion

E(M) = expected average daily cash balance

E(N) = expected number of conversion

t = Number of days in the period

i = lost opportunity cost

3. Orgler’s model

Orgler model provides for integration of cash management with production and other aspects of the business concern. Multiple linear programming is used to determine the optimal cash management. Orgler’s model is formulated, based on the set of objectives of the firm and specifing the set of constrains of the firm.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

No comments:

Post a Comment

Do you have any reasonable comments for this post ? Please feel free to drop them below using the comment box. We will moderate and publish them as soon as possible. Cheers !

Start typing and press Enter to search