Cash Management Flashcards
Motives for holding cash?
Transactions motive
Precautionary motive
Speculation motive
What is transactions motive?
Business primarily needs to plan sufficient cash to meet its forecast transactions
What is a precautionary motive?
Cash needed to meet unexpected occurrences. Often means business arrange an overdraft that can be converted into cash
What is a speculation motive?
Some businesses hold surplus to take advantage of attractve investment opportunities
What is a cash flow forecast?
A detailed forecast of cash inflows and outflows incorporating both revenue and capital items
What is included in cash flow forecast?
Tabulates estimated future cash receipts and payments in a way to show the forecast of cash balance at defined intervals
How to ease cash shortages
Delaying non-essential capex
Accelerate cash inflows
Selling assets previously acquired
Negotiating a reduction in cash outflows
Example of delaying capex?
Cars replaced every 3 years instead of 2
How to negotiate a reduction in cash outflows?
Longer credit might be taken from suppliers
Dividend payments could be reduced
Characteristics of desirable investments?
Generally low risk and liquid
What are treasury bills?
Short-term government IOUs, can be sold when needed
What are term deposits?
Fixed periold deposits
What are certificates of deposit?
Issued by banks, entitle holder to interest plus principal
What is commercial paper?
Short-term IOUs issued by companies, unsecured
What is baumol model based on?
Based on the idea that deciding on optimum cash balances is like deciding on optimum inventory levels
What does the baumol model assume?
Cash is steadily consumed over time and business holds a stock of marketable securities that can be sold when cash is needed
What is cost of holding cash in EOQ?
Cost of obtaining the funds net of any interest earned by investing the funds
What is cost of placing an order in EOQ?
Administration cost incurred when selling the securities
What is demand in EOQ?
Annual cash required
Issue with baumol model?
Difficult to predict amount required for future perioids
Unlikely cash is used at constant rate over a given period
Why is Miller-Orr > Baumol
It is more realistic
What is Miller-Orr model?
Outflow varies considerably on a day to day basis
Issue with Miller-Orr model?
Estimates used are likely based on historical info
Model does not incorporate seasonality
