In 1966 Metron Miller and Daniel Orr developed a cash management model that solves for

optimal target cash balance about which the cash balance fluctuates until it reaches an upper or
lower limit. If the upper limit is reached investment securities are bought bringing the cash
balance down to the target again. If the lower limit is reached investment securities are sold
bringing the cash balance up to the target (Gallagher and Andrew, (2003)
The formula for the target cash balance Z is:
Z = 3 3 x TC x V + L
4xr
Where: TC = Transaction cost of buying or selling short-term
investment securities
V = Variance of net daily cash flows
r = Daily rate of return on short term investment
securities
L = Lower limit to be maintained in the cash account
Pandey (2008) has provided in his book, that cash management is concered with managing of
cash flows into and out the firm as well as cash flows within the firm, and also cash balances
held by the firm at a point of time by financing deficit or investing surplus cash.
He added that in order to resolve the uncertainty about cash flow prediction and lack of
synchronisation between cash receipts and payments, the firm should develop appropriate
strategies for cash management. The firm should evolve strategies regarding the following four
facets of cash management which includes: