Cash Management

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 Heads for Discussion
1. Cash
2. Cash Planning
3. Managing Cash Collection and Disbursement
4. Determining the Optimum Cash Balances
1. Baumol’s Model
2. Miller-orr Model
5. Investing Surplus cash in Marketable Securities
6. Types of Short-term Investment Opportunities

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1. Cash

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2. Cash Planning

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 3. Managing Cash Collection and
Disbursements
• Deposit Float: Amount sent by the customer
but not received by the company.
• Decentralized Collection (Concentration
Banking).

• Lock Box System

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4. Determining the Optimum Cash
Balance

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1. Baumol Model (Certain Cash Flow)

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F= Transaction Cost Per Transaction
T=Total Annual Cash Requirements
r= opportunity cost in percentage

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 Example 1
Estimate the optimum cash balance for an
automobiles supplies form that has the
following characteristics..
• The annual cash usage for the firm is $10
Million
• The cost per sale of securities is $50
• The annual interest rate is 10%
Ans: $100,000
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2. Miller-orr Model (Uncertain Cash
Flow)

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Upper Limit = L +3Z
Return Point = L+Z

L is decided by the firm

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 Example 2
Estimate the optimum cash balance for a computer
software firm with uncertain cash flows. The firm
has the following characteristics:
• The standard deviation in daily cash balance is
$10,000; the variance is $100 million
• The minimum cash balance this firm has to
maintain is $1,00,000
• The interest rate on daily basis is .01%.
• The transaction cost for each sale or purchase of
security is $50
Ans: 3Z (The spread) =$ 1,00415
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5. Investing Surplus cash in Marketable
Securities
Selection of Investment Opportunity
• Safety
• Maturity
• Marketability
• Return

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 6. Types of Short-term Investment
Opportunities
• Call Money Market
• Treasury Bills
• Commercial Papers
• Certificate of Deposits
• Bank Deposits
• Inter Corporate Deposits
• Money Market Mutual Funds
• CBLO (Collateralized Borrowing and Lending
Obligation)
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