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Adequate cash balance-Case study of Cash Management

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Mathew M.
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  1. Introduction
  2. Importance of Cash Management
  3. Determination of the Adequate Cash Balance/ Right Target Cash Balance
  4. The Miller-Orr cash management model
  5. Conclusion

Time and again, cash management has become a common phenomenon inseparable from an individual's life, following the increasing requirements to settle increasing transactions. Typically, cash management system in organizations applies the principle of making payments and cash receipts in settlement of organization obligations. Nevertheless, managing cash flows remain a challenging issue both for small and large enterprises owing to its liquid feature than other current assets. For that reason, sustaining complete control over the supply and demand of cash in the organization is essential to avoid missing emerging opportunities or failure to meet obligations as they fall due. For instance, lack of enough cash as an investment factor has driven many enterprises into bankruptcy following neglected cash management principles. Essentially, organizations must focus beyond the figures in the financial statements and accept cash as a determinant factor of organizational failure or success.

[...] (2010). Planning Optimal from the Firm Value Creation Perspective. Levels of Operating Cash Investments. Romanian Journal of Economic Forecasting, 198-214. Ross, S., Hillier, D., Westerfield, R., Jaffe, J., & Jordan, B. (2012). Cash Management. McGraw-Hill Publishers. [...]


[...] However, the firm will not make any adjustments when the target balance is wandering between the two limits. The model seeks to make the estimation more realistic by assuming that balances will randomly be in fluctuations within the upper and lower limit. Symbolically, the target cash balance is determined as (3br2/4i), where r represent the variance of daily changes in cash balances, b cost of converting securities and I the lost opportunity costs (Jain, 2007). Moreover, when the firm has the forecasting ability in a short period perspective, the Stone Model is applicable where external and internal limits replace the lower and upper limits in the Miller-Orr model. [...]


[...] Factually, maintaining adequate cash balances involves retention of cash within sufficient levels to strike balance between the profitability and liquidity of the firm. Empirically, lower liquidity levels in a company subject its operations to disruptions arising from the untimely settlement of the liabilities and emergence of restrictive policies with shorter recovery periods for receivables. Similarly, the cash balances must be within the desired level since retention of exceedingly surplus cash, negatively affects profitability due to ADEQUATE CASH BALANCE ineffective utilization of company resources. [...]


[...] This demands assuming appropriate cash planning approach to avoid potential cash crisis in the eventuality of overwhelming bad debts. ADEQUATE CASH BALANCE Lastly, cash management guarantees the organization conservation to ensure the entity derives the maximum value for every cash unit committed into investments. Determination of the Adequate Cash Balance/ Right Target Cash Balance 3 Management decisions regarding the target cash balances are normally complex requiring a systematic analysis of the organization present status, environmental demands and forthcoming obligation that must be settled to guarantee its smooth operation. [...]

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