Cash balance, Cash Management, time
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. [...]
[...] In particular, the Miller-Orr and the Baumol models assume the firm will always incur transaction cost when converting securities into cash while simultaneously bearing opportunity cost when holding balances, which would have generated a profit elsewhere. Nevertheless, such methods depend on the management intuition founded on the anxieties of risk that the management hedge against. Essentially, organizations must focus beyond the figures in the financial statements and accept proper management to avoid retention of large balances that generate huge holding cost in the form of lost opportunity income. ADEQUATE CASH BALANCE Bibliography Baker, H. K., & Powell, G. (2009). Understanding Financial Management: A Practice Guide. John Wiley & Sons. Chandra, D., & Bose, C. [...]
[...] Similarly, the firm will incur transaction costs when converting marketable securities into cash, bT/C. Here, b represents fixed transaction cost, T as the annual deposit while C shows 8 the regular deposit (Baker & Powell, 2009). Therefore, the company incurs total cost comprising transaction costs and opportunity costs, b Performing a total differentiation and determining the value of optimal deposit C*yields, (2Bt/i) where transaction cost equals the value of opportunity cost. Cost Trade-Off in a Baumol's Model: Chandra, D., & Bose, C. (2006). Fundamentals Of Financial Management. PHI Learning Pvt. Ltd. [...]
[...] Determination of cash balances using the above model suits firms in dynamic situations where there exists no guarantee of their sales. At a time when the balances reach the upper or the lower limits, the firm purchases/ sells short-term securities, open or closes short-term deposits or repays/ raises short-term loans to restore the target cash balance Cmo (Michalski, 2010). The Miller-Orr cash management model Source: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Working%20Capital%20Cash%20 Management.aspx The success of the model depends on past experience which assists the management set the lower cash balance considering factors such as access to short-term financing, holding costs, transfer costs associated to funding shortages and variable cash flows. [...]
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