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Baumol Cash Model

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Cash Management Homework

Cash Management is significant because it is used to pay the firm’s obligations. Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. Cash management is mainly concerned with the managing and controlling of cash flows into and out of the firm within a given period of time, cash management also manages cash flows within the firm and it gives an outlook of the cash balances held by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by a cash management cycle as shown in sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management sells to accomplish this cycle at a minimum cost. Cash management is also important because it is difficult to predict cash flows accurately, particularly the inflows, and there is no perfect coincidence between the inflows and outflows of cash.

At the same time, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. However, cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore, the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

During some periods, cash outflows will exceed cash inflows, because payments for taxes, dividends, or seasonal inventory buildup. At other times, cash inflow will be more than cash payment because there may be large cash sales and debtors may be realized in large sums promptly.

Some of its main topics are:

1. Planning of cash budgeting

2. Cash management facets

3. Investing surplus cash

4. Holding cash motives

5. Baumol’s optimum cash balance

6. Miller optimum cash balance

7. Sensitivity analysis

8. Short-term forecasting methods

9. Types of short-term investment opportunities