cash management and models

8/9/2019 Cash Management and Models

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Cash CycleCash Cycle

Factors that infuence the desiredFactors that infuence the desired

level o cashlevel o cash

Optimal cash inventoriesOptimal cash inventoriesShort-term investment strategiesShort-term investment strategies

Cash ManagementCash Management


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The Manager

Resource Decisions

InormationDecisions

Financing Decisions

Investment Decisi

ons

uman ResourcesDecisions

Managing an entity’s Resour Managing an entity’s Resour

Cash ManagementInventory Management!or"ing Capital ManagementInvestment in uman Capital#ong-term $ssets$ccounts Receiva%le

&conomics o InormationData%ase ManagementData ModelingIS 'lanning ( Development

De%t vs) Ta* Financing

Cost o

Capital

Discount Rate

ValueCreatio

Financial

Markets

Cash Info+s

OperatingDecisions

Recruitment, Selection Training, 'roductivity'erormance $ppraisalCompensationnions ( #a%or Relations

Life cycle eects,

Business cycle, public events,etc.


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OverviewOverviewST .n/l planning 0 deals +1 short-lived assets

and lia%ilities 2+or"ing capital management34

concerned +1 53 si6e o investment in C$ li"e

cash, $1R, Inventory7a tool is cash budget analysis and 83 ho+ to .nance ST assets7atool is perorming credit analysis


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Managing WC involvesManaging WC involves

determine:determine:

o+ much to invest in C$9

- C$ vs) F$

- :ature o activities1programs; In each C$9

- Cash, $1R, Inventory

- Cash Mgt- $1R is Credit Mgt- Inv 0 'OM ( Cash %alance

models


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Our objectivesOur objectives#earn a%out the Cash Cyclenderstand the actors that infuence the

desired level o cash#earn t+o models that calculate the

optimal level o cash


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Objectives of Public MoneyObjectives of Public Money

ManagersManagers

>ringing the entity/s cash resources +ithincontrol

$chieving optimum conservation and

utili6ation o the unds


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Key areas of Public CashKey areas of Public Cash

ManagementManagement

Organi6ation

Collection and dis%ursement o unds

:etting o interagency paymentsInvestment o e*cess unds

Optimal level o cash %alances

Cash planning and %udgeting>an" relations


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Treasury Management ofTreasury Management of

Cash BalancesCash Balances

Operate +ith smaller amount o cash

Supervision is centrali6ed>etter service rom %an"s

'roper allocation o unds


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How much cash should aHow much cash should a

organization keep on hand?organization keep on hand?&nough cash to ma"e payments +hen

needed) 2transactions motive3

2Daily or !ee"ly Cash >udget helpul3

$dditional cash may %e held orune*pected re?uirements) 2precautionarymotive3


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The sie of theThe sie of the minimumminimum cash balance de!ends on:cash balance de!ends on:

o+ ?uic"ly and cheaply a organi6ationcan raise cash +hen needed)

o+ accurately managers can predictcash re?uirements)2Cash >udget helpul3

o+ much precautionary cash themanagers need or emergencies)


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The organiation"sThe organiation"s maximummaximum cashcash

balance de!ends on:balance de!ends on:$vaila%le 2short-term3 investment

opportunitiese)g) money mar"et unds, CDs, commercial paper

&*pected return on investment opportunities)e)g) I e*pected returns are high, organi6ations

should %e ?uic" to invest e*cess cash

Transaction cost o +ithdra+ing cash andma"ing an investmentDemand or Cash or daily transactions2Cash >udget helpul3


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50000000 1002 504 339.3333333 258 210

Order Quantit

Cost %&'

Z !

"otal #osts

Holding #o (Z%&!r

Order #osts$(M % %Z

O!timal Cash Balance via BaumolO!timal Cash Balance via Baumol

Z !E0 √ 28METC31rG

M (&)*+***

M (&)*+***

r ( ,*)- ,***)

r ( ,*)- ,***)

TC ( &.*TC ( &.*

/ (

&01+.20

/ (

&01+.20


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Problems with the Baumol MoProblems with the Baumol Mo

• Cash flows may not be very predictable, much less

constant• Treasurers may want a ‘safety stock’ of cash


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The Miller 3 Orr ModelThe Miller 3 Orr Model

The Miller-Orr Model provides a ormula ordetermining the optimum cash %alance 23,the point at +hich to sell securities to raisecash 2lo+er limit #3 and +hen to investe*cess cash %y %uying securities andlo+ering cash holdings 2upper limit 3)Depends ontransaction costs o %uying or selling securitiesvaria%ility o daily cash 2incorporates

uncertainty3return on short-term investments


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4ays of the Month

4 o l l a

r s i n

t h e

C a s h

5 c c o

u n t


'ower 'imit

pper 'imit

Z

Sell Securities

Buy SecuritiesH

'


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The Miller3Orr ModelThe Miller3Orr Model

3 Target Cash Balance %/'3 Target Cash Balance %/'

1 6 TC 6 7

2 6 r/ ( 8 9

1

where: TC ( transaction cost of buyin or selling securities

7 ( variance of daily cash o r ( daily return on short3ter

investments 9 ( minimum cash re;uireme


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3 Target Cash Balance %/'3 Target Cash Balance %/'

&*ample Suppose that short-termsecurities yield HB per year and it costs theorgani6ation @HA each time it %uys or sellssecurities 2TC3) The daily variance o cash

fo+s is @5AAA 23 and your %an" re?uires@5,AAA minimum chec"ing account %alance2#3)E

1 6


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3 >!!er 9imit3 >!!er 9imit The upper limit or the cash account 23 is

determined %y the e?uation 0 J - 8#+here

0 Target cash %alance# 0 #o+er limit

In the previous e*ample 0 J 2@K,AAA3 - 82@5,AAA3 0 @5A,AAA


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4ays of the Month

4 o l l a

r s i n

t h e

C a s h

5 c c o u n t


'ower 'imit

pper 'imit

)*++

Sell Securities

Buy Securities),+-+

),+++


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Cash PoolingCash Pooling

Centrali6ed cash management involvestranser

o an agency/s cash in e*cess o minimal

operating re?uirements into a centrallymanaged

account also "no+n as a cash !ool,

'rocedure

and>ene.ts


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$nvestment of e6cess$nvestment of e6cess

fundsfunds


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The Collection ? 4isbursement ofThe Collection ? 4isbursement of

Public @undsPublic @unds

#ontrolling #ash#ollection ./is0ursement

Dual responsi%ilityReceipts maintained

in a location separaterom cash ( chec"s

Certi.cation ovouchers

Managing #ash1alances

Saety

#i?uidityMa*imi6e pool o unds

availa%le orinvestment

Concentration$ccountsero-%alance accounts

ighest yield


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Collection of fundsCollection of funds:eed or accelerating collections

o+ to accelerate collection o

receiva%les


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4isbursement of funds4isbursement of funds

$m!ortance of disbursement of funds

Aeview of disbursements

'ayment instruments %eing used 2chec"s,drats, +ire transers, etc)3

>an" charges and internal costs

Techni?ues %eing used

Time involved or processing o instruments


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Payments etting in PublicCash Management

:eed or payments netting'rocedure involved

Only netted amount is transerred 2%ilateralnetting3

:etting center 2multilateral netting3


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Our objectivesOur objectives#earn a%out the Cash Cyclenderstand the actors that infuence the

desired level o cash#earn t+o models that calculate the

optimal level o cash


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Payments netting in PublicPayments netting in Public

Cash Management %contd,'Cash Management %contd,'


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Payments etting in PublicPayments etting in Public

Cash Management %contd,'Cash Management %contd,'


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Cash Planning andCash Planning and

BudgetingBudgeting


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Cash Planning andCash Planning and

Budgeting %contd,'Budgeting %contd,'


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