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Synchronization
Short
of Cash flows.
Costs. Excess Cash Balance Costs. Procurement and Management. Uncertainty and Cash Management.
Cash Budget
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
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.
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
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