Cash and funding strategies Flashcards
Holding insufficient cash to pay liabilities can____
Lose settlement discounts
Lose goodwill
Force liquidation
What are the 3 reasons for holding cash?
- Transactions motive 2. Precautionary motive 3. Investment Motive
What are the two cash management models, and what were they developed to do?
The Miller Orr Model The Baumol Model Developed to minimise the cost of moving funds between current accounts and short term investments
What is the Miller-Orr Model?
A model for setting the target cash balance which incorporates the uncertainty in infow/outflow
In the M.O Model, what is the upper limit?
Lower Limit + Spread
In the M.O Model, what is the spread?
3 [(3/4 x transaction cost x Variance) / Interest rates](1/3)
Variance =
Standard Deviation 2
The Baumol Model is used to establish____
the value of cash to be transferred between the current account and short term investment account when the demand for cash is moving steadily in one direction.
The Baumol Model uses the EOQ formula. What does each part stand for?
D = demand for cash
Ch= Cost of holding cash
Q = amount of money to transfer
The Baumol model suggests that cash held in non interest bearing accounts should be low when interest rates are _____.
High
In terms of financing approaches, what is the aggressive approach?
All fluctuating current assets and most permenent current assets are financed with short term finance
In terms of financing approaches, what is the conservative approach?
Long term finance is used for most current assets including a proportion of fluctuating current assets
What is the matching approach?
Fluctuating current assets financed by short term credit
Permenent current assets and non current assets financed by long term funds.
Short term finance is usually cheaper than long term finance.
Aggressive or Conservative?
Aggressive
Lower financing costs should result in better profitability.
Aggressive or conservative?
Aggressive
