Financial Management

Baumol Model (William) Cash Management

Optimal Cash ²(Annual Cash Requirement)

(Cost Per Transaction)

Balance (OCB) Opportunity Cost of

Holding Cash

Total Cost of Cash Balance = °Holding Cost +°°

Transaction Cost

°Holding Cost = Average Cash Balance x

Opportunity Cost

Average Cash Balance = Optimal Cash Balance ÷

°°Transaction Cost = No. of Transactions x Cost

per Transaction

Number of Transaction = Annual Cash

Requirement ÷ OCB

Cash Conversion Cycle

Average Age Inventory xx

Average Collection Period xx

Operating Cycle xx

Average Buyout Period (xxx)

Cash Conversion Cycle xxx

Cash Management Strategies

1. Accelerating Collection (Lockbox

System)
2. Slowing Disbursement (Playing Floats)

3. Redding Precautionary (Zero Balance

Accounts)

Idle Cash

Concept of Float

1. Types of Float

2. Positive Float (Disbursement)

3. Negative Float (Collection)

- Mail Float – Customer payments

mailed but not yet received by

seller.

- Processing Float – Customer

payment received by the seller but

not yet deposited.

- Clearing Float – Amount of

customers’ check that have been

deposited but have not cleared