William Baumol (Baumol WJ) first proposed and published in 1952 in his monograph "The Transaction Demand for Cash: An Inventory Theoretic Approach" the hypothesis that the balance of cash in the account is in many ways similar to the balance of inventories, so the model is optimal order quantity (EOQ) can also be used to determine the target balance Money.
It is assumed that the enterprise begins to work, having the maximum and expedient level of funds for it, and then gradually spends them over a certain period of time. The company invests all incoming funds from the sale of goods and services in short-term securities. As soon as the cash reserve is depleted, that is, it becomes equal to zero or reaches a certain predetermined level of safety, the enterprise sells part valuable papers and thereby replenishes the stock of cash to its original value. Thus, the dynamics of the balance of funds on the current account is a "sawtooth" graph (Fig. 13).
Fig.13 - Graph of changes in the balance of funds on the current account
(Baumol model)
The replenishment amount (Q) is calculated by the formula:
,
(10.8)
where 
- forecasted need for funds in the period (year, quarter, month);
- Expenses for converting cash into securities;
- acceptable and possible for the enterprise interest income on short-term financial investments such as government securities.
So the average cash balance is 
, and the total number of transactions for the conversion of securities into cash (K) is equal to:
,
(10.9)
The total cost (OR) of implementing this cash management policy would be:
,
(10.10)
The first term in this formula is direct costs, the second is the lost profit from keeping funds in a checking account instead of investing them in securities.
10.3.2 Miller–Orr model
Merton Miller (Miller M.H.) and Daniel Opp (Orr D.A.) created and first published in 1966 in the book "Model of the Demand for Money by Firms" a model for determining the target cash balance, taking into account the uncertainty of cash payments and receipts.
Baumol's model is simple and quite acceptable for enterprises whose cash costs are stable and predictable. In reality, this rarely happens; the balance of funds on the current account changes randomly, and significant fluctuations are possible.
The model developed by Miller and Orr is a compromise between simplicity and reality. It helps to answer the question: how should a company manage its cash supply if it is impossible to predict the daily inflow or outflow of cash? Miller and Orr use the Bernoulli process to build the model, a stochastic process in which the receipts and expenditures of money from period to period are independent random events.
The logic of actions of the financial manager to manage the balance of funds on the current account is shown in the figure and is as follows. The account balance fluctuates randomly until it reaches upper limit. As soon as this happens, the enterprise begins to buy a sufficient amount of securities in order to return the stock of funds to some normal level (point of return). If the cash reserve reaches the lower limit, then in this case the company sells its securities and thus replenishes the cash reserve to the normal limit.
The concept of the Miller-Orr model is shown in fig. 14.
Rice. 14 - Schedule of changes in the balance of funds on the current account
(Miller-Orr model)
When deciding on the range of variation (difference between the upper and lower limits), it is recommended to adhere to the following policy: if the daily variability cash flows is large or the fixed costs associated with buying and selling securities are high, then the company should increase the range of variation and vice versa. It is also recommended to reduce the range of variation if there is an opportunity to generate income due to the high interest rate on securities.
The implementation of the model is carried out in several stages.
,
(10.11)
,
(10.12)
,
(10.13)
When using the Miller-Orr model, you should pay attention to the following points:
Cash is vital to the operation of any business and is an integral part of its working capital. At the same time, the following features are characteristic of cash:
- loss of purchasing power due to inflation;
- ability to generate income.
Due to the above features, there is an objective need to justify the optimal balance of funds, which will not be excessive and at the same time will be sufficient to maintain solvency. allows you to calculate its value, subject to certain provisions.
Initial provisions of the Baumol model
- cash flows are not subject to fluctuations, that is, it is initially assumed that cash is spent evenly;
- spending of funds is carried out to zero balance;
- there is some uncertainty in the flow of funds;
- the possibility of using a credit line or overdraft is not expected;
- the opportunity cost of maintaining a cash balance does not change;
- surplus funds are invested in liquid securities;
- when buying and selling liquid securities into cash, certain transaction costs arise.
Calculation of the optimal cash balance
The value of the optimal cash balance, according to the Baumol model, depends on two factors: the cost of one cash replenishment transaction and the opportunity cost of maintaining it. In this case, the total cost function can be represented as follows:
where C- cash balance;
F– transaction costs of replenishing the balance of funds;
T- annual need for cash;
k– the opportunity cost of maintaining the cash balance (the interest rate on liquid securities).
From the resulting equation, we can express the optimal cash balance ( English Optimal Cash Balance, OCB):
Graphically, these dependencies can be expressed as follows:
Example. The company's need for cash is 75,000 USD. per week, transaction costs for the purchase and sale of securities are 800 USD, and the interest rate on liquid securities is 9% per annum.
The company's annual cash requirement is $3,900,000. (75000*52). In this case, the optimal cash balance in accordance with the Baumol model will be 263,312.24 c.u.
Interpretation of the Baumol model
Provided that the initial provisions of the Baumol model are met, the resulting optimal cash balance is sufficient to maintain the solvency of the business. When the condition of uniform spending of funds is met, there is no need to maintain the insurance balance, so their minimum balance will be equal to 0.
Since the expenditure of funds to zero balance is carried out over a certain period of time, all receipts received should be invested in liquid securities. Upon reaching cash balance zero balance, it is necessary to replenish it to the optimal one by converting liquid securities.
One of the most well-known cash management models is the Baumol model. It was developed in 1952 by W.J. Baumol based on the inventory management model EOQ (Economic Order Quantity)). The main assumptions of the Baumol model are:
1. The company's steady need for cash;
2. All cash receipts the company immediately invests in highly liquid securities;
3. The cost of converting investments into cash does not depend on the amount being converted (fixed for one operation);
4. The enterprise begins work with the maximum expedient cash balances.
The Baumol model is applicable in cases where an enterprise can predict its cash needs with a sufficient degree of certainty. At the same time, as already noted, it is assumed that the enterprise begins to work with the maximum appropriate level of cash Q+m. Then the enterprise evenly (due to sustainable needs) spends these funds over a certain period of time (see Figure 8.5).
Rice. 8.5. Change in cash balances of the enterprise according to the Baumol model
As soon as the cash balances fall to the minimum allowable safety stock m, the enterprise sells part of its short-term investment and replenishes its cash reserve to the initial level.
At the same time, it is assumed (see assumption 2) that the funds received by the enterprise as a result of the sale of products, goods, services are transferred as soon as they are received into short-term investments.
Let us introduce the following notation:
V- the projected total need for funds for the period (usually a year);
c- costs of converting short-term investments into cash (transaction costs);
r is the average annual return on short-term investments.
The number of conversions of securities into cash during the period will be .
General costs of the enterprise TC related to cash management for the period will be:
where the first term is transaction costs and the second term is opportunity costs.
To determine the amount of replenishment of cash balances Q opt ., with which TC minimally differentiate the function TC(Q) on Q:
Equating expression (8.2) to zero, we find the value Q corresponding to the minimum of the function TS:
A graphical illustration of cost minimization using the Baumol model is shown in Figure 8.6.
Rice. 8.6. Cost minimization according to the Baumol model.
Graphs in fig. 8.6 are built under the following conditions: V= 2000 thousand rubles, c= 0.1 thousand rubles, r= 5%, m= 50 thousand rubles.
Calculation by formula (8.8.3) showed that Qopt≈ 89.44 thousand rubles The same result can be obtained graphically with an acceptable degree of accuracy.
Miller-Orr model
In 1966, Merton Miller and Daniel Orr (M.H.Miller, D.Orr) developed a cash management model that is much closer to reality than the Baumol model. It helps answer the question: how should an enterprise manage its cash supply if it is impossible to predict the daily outflow or inflow of cash. Miller and Orr used the Bernoulli process in building the model, a stochastic process in which the receipt and expenditure of money from period to period are independent random events.
The basic premise of the Miller-Orr model is that the distribution of daily cash flow balances is approximately normal. The actual value of the balance on any day may correspond to the expected value, be higher or lower than it. Thus, the cash flow balance varies by day randomly; no trend is foreseen.
The implementation of the model is carried out in several stages [ Kovalev]:
1. The minimum amount of cash is set ( L), which is advisable to constantly have on the current account (determined by an expert based on the average need of the enterprise to pay bills, possible requirements of the bank, creditors, etc.).
2. According to statistical data, the variation of the daily receipt of funds to the current account (σ 2) is determined.
3. Opportunity costs are determined r- expenses for keeping funds in the current account (usually they are taken in the amount of daily income rates for short-term securities circulating on the market) and expenses c on the mutual transformation of cash and securities (this value is assumed to be constant per transaction).
4. Calculate the range of variation of the cash balance on the current account R according to the formula
5. Calculate the upper limit of cash on the current account H, above which it is necessary to convert part of the funds into short-term securities:
H=L+R (8.5)
6. Determine the cusp point ( Z) - the value of the balance of funds on the current account, to which it is necessary to return if the actual balance of funds on the current account goes beyond the interval ( L, H):
An example of a graph depicting the dynamics of cash using the Miller-Orr model is shown in fig. 8.7.
Rice. 8.6. Dynamics of cash balances of the enterprise using the Miller-Orr model [ Kovalev, p. 547].
At the point in time t 1 there is a purchase of securities for the amount ( H – Z), and at the moment t 2 securities are sold with net proceeds ( Z – L).
When using the Miller-Orr model, attention should be paid to the following points[ Brigham, Gapensky, pp.312-313].
1. The target account balance is not an average between the upper and lower limits, since its value often approaches its lower limit than its upper one. Setting the target balance to the average between the limits will minimize transaction costs, but setting it below the average will result in a reduction in the opportunity cost. Based on this, Miller and Orr recommend setting a target balance of , if L= 0; this minimizes the overall cost.
2. The value of the target cash balance and, therefore, the limits of fluctuation, increase with growth c and σ 2 ; increase c makes it more costly to hit the upper limit, and a larger σ 2 leads to more frequent hits of both.
3. The value of the target balance decreases with an increase r; since if the bank interest rate increases, then the value of opportunity costs increases and the firm seeks to invest funds, and not keep them in the account.
4. The lower limit does not have to be zero, but can be positive if the firm has to maintain a compensatory balance or if management prefers to have a cash buffer.
5. The experience of applying the described model has shown its advantages over purely intuitive money management; however, if the firm has several alternative options for investing temporarily free cash, and not the only one in the form of buying, for example, government securities, then the model ceases to work.
6. The model can be supplemented with the assumption of seasonal revenue fluctuations. In this case, cash flows will not follow the normal distribution, but will take into account the likelihood of an increase or decrease in the balance of funds, depending on whether the company is experiencing a period of recession or recovery. Under these assumptions, the value of the target cash balance will not always be equal between the upper and lower limits.
Stone model
The Stone model, in contrast to the Miller-Orr model, pays more attention to the management of the target balance than to its definition; However, they are similar in many respects Brigham, Gapensky, p. 313-314]. The upper and lower limits of the account balance are subject to change depending on the information on cash flows expected in the next few days. The concept of Stone's model is presented in fig. 8.7. As in the Miller-Orr model, Z is the target account balance that the firm is aiming for, and H and L- respectively, the upper and lower limits of its fluctuations. In addition to the above, the Stone model has external and internal control limits: H and L- external, and ( H – X) and ( L + x) are internal. In contrast to the Miller-Orr model, when immediate actions are taken when control limits are reached, in the Stone model this does not always happen.
Rice. 8.7. Dynamics of cash balances when using the Stone model [ Brigham, Gapensky, p. 313].
Assume that the account balance has reached the external upper limit (point A in fig. 8.7.) at the time t. Instead of automatically converting the value ( H– Z) from cash to securities, the financial manager makes a forecast for the next few days (in our case, five). If the expected balance of funds at the time ( t+ 5 ) will remain above the internal limit ( H– x), for example, its size is determined at the point V, then the sum ( H– Z) will be converted into securities. Further dynamics of the cash balance in this case will correspond to the thick line starting at the time t.If the forecast shows that at the moment ( t+ 5 ) the value of the cash balance will correspond to the point WITH, then the firm will not buy securities. Similar reasoning is true for the lower limit.
Thus, the main feature of the Stone model is that the actions of the firm at the current moment are determined by the forecast for the near future. Therefore, reaching the upper limit will not cause an immediate transfer of cash into securities if relatively high cash outflows are expected in the coming days; thereby minimizing the number of conversion operations and, consequently, reducing costs.
Unlike the Miller-Orr model, the Stone model does not specify methods for determining the target cash balance and control limits, but they can be determined using the Miller-Orr model, and x and the period for which the forecast is made - with the help of practical experience.
A significant advantage of this model is that its parameters are not fixed values. This model can take into account seasonal fluctuations, since the manager, when making a forecast, evaluates the features of production in certain periods.
The disadvantage of the Stone model is the emergence of subjectivity. If the manager makes a mistake with the forecast, then the firm will incur the costs associated with storing an excess amount of cash (in the case of an upper limit) or lose liquidity for a short time (in the case of a lower limit). However, correct short-term forecasting of the size of the cash balance can reduce transaction costs.
Simulation
Simulation modeling is the most accurate of the considered models, but at the same time the most time-consuming. The modeling technique is described by Brigham and Gapensky ([ Brigham, Gapensky, p. 314-316].
Modeling starts with a preliminary cash flow budget. After that, an assumption about the probabilistic nature of the indicators is introduced into the forecasting methodology.
It is supposed to calculate the volume of monthly sales ( S) a random variable with a normal distribution. Let us denote the coefficient of variation in the volume of monthly sales as CV, and its standard deviation as s S. We will also assume that over time, the relative variability of the sales volume is constant.
Then the standard deviation of the sales volume for i-th month will be equal to:
where Si- volume of sales i th month.
The receipt of proceeds from sales is related to the actual, and not to the expected volume of sales, that is, the scheme for receiving payments is based on information about real sales that took place in the past.
The essence of the Monte Carlo method is based on studying the operation of a model of a system when it receives random input data with specified characteristics (distribution type, variance, etc.) and restrictions. In our case, it is necessary to model (at a given level of significance) the value of a possible shortage of funds from an enterprise by months and plan the corresponding values as a target balance. The key indicator here is the level of significance set by the manager - the probability with which the results obtained (the target residual) are statistically significant. The recommended level is around 90%.
Brigham and Gapensky point out that it is possible to introduce the assumption that monthly sales volumes depend on each other; that is, for example, if the actual implementations in i-th month will be below their expected level, this should serve as a signal of a decrease in sales revenue in the following months. V this case the uncertainty of cash flows will increase and, therefore, to ensure the desired level of security, it is necessary to set the target cash balance at a relatively higher level [ Brigham, Gapensky, p. 316].
The main advantage of simulation modeling is the relatively high accuracy of the results obtained.
However, it should be noted that the use of this method for financial forecasting in practice is practically impossible without the use of a computer. In addition, to obtain reliable results, it is desirable to have information on the company's cash flows for at least two previous years in order to obtain a representative sample of initial data.
Accounts receivable management.
Accounts receivable, or accounts receivable, is one of the most important and significant elements in terms of specific weight current assets enterprises. Modern trade practice increasingly relies on the buyer receiving a deferral of payments for delivered products, which results in the formation of significant accounts receivable from the seller (supplier).
The level of receivables of the enterprise is determined by:
Type of products sold
Degree of saturation of the market with this type of product
The system of calculations adopted at a particular enterprise
General economic factors
Receivables management is a classic example of risk-return trade-offs: the optimal level of receivables is determined on the basis of a trade-off between the increase in sales and, as a result, profits as a result of lower credit requirements for customers, and the parallel rising costs of financing an increasing level of receivables and increase in probable losses on bad debts. At the same time, the main regularities are clearly observed financial management: the expected return varies inversely with the liquidity of the asset (in this case, receivables) and is unidirectional with risk. At the same time, attempts popular in the domestic literature to attribute debts for shipped products to the object of receivables management, which significantly exceed in their urgency the industry average indicator of the receivables turnover period, or even a period of 12 months, are obviously untenable: such “receivables” are already cannot be considered as component current assets.
An important element of receivables management is the ranking of receivables according to the timing of their occurrence (drawing up the so-called "aging register" of receivables), as well as monitoring its turnover (turnover of funds in settlements). The latter is carried out on the basis of a number of turnover indicators, which are discussed in the corresponding section of the course.
A very popular tool for controlling receivables is to compare the average maturity of accounts receivable with the average maturity of debt on supplier accounts ( accounts payable). With all the conventions of such a comparison (due, in particular, to the different nature of the obligations and, in some cases, different volumes), it can show whether the enterprise is a net creditor that finances investments in the working capital of its customers at its own expense, or, conversely, a net borrower using the funds of its counterparties. Here it should be noted, however, that the arguments about the management of accounts receivable based on the analysis of the operating and financial cycles of an enterprise, popular with many domestic theorists, in practice, face significant limitations. The operating cycle of an enterprise is, as is known, equal, on the one hand, to the sum of the duration of the production process3 and the average maturity (circulation period) of receivables, and on the other hand, to the sum of the duration of the financial cycle and the average maturity (circulation period) of debt on supplier accounts (accounts payable ). If we approach the problem of receivables management “mechanically”, then the task of minimizing the duration of the financial cycle4 (namely, for this period, the company’s funds are diverted from turnover and the company has to use financing from own funds or to attract a loan) can be solved in two ways5. On the one hand, it is possible to tighten the conditions for the release of products on credit, which should reduce the period of circulation of receivables, but at the same time reduce the volume of sales (profit). On the other hand, you can "pull" with the payment of suppliers' invoices. Within certain limits, this may “work”, however, if this technique is abused, the supplier will be objectively forced to revise the terms of delivery or simply include the cost of financing its increased receivables in the delivery price. The result is an increase in costs and a drop in profits. The art of government here consists precisely in avoiding both dangers as much as possible.
From a practical point of view, the most important tool for managing the receivables of an enterprise is its credit policy, represented by two interrelated activities: granting a deferral of payments and collection of debts.
The credit policy of the enterprise involves making decisions on five main issues [ Levy, Sarnat]:
1. Determining the period for which the payment is deferred;
2. Definition of lending instruments, i.e. legal form of registration of a commercial loan;
3. Formation of credit standards - a set of criteria and procedures for determining "good" and "bad" in terms of providing a deferral for customer payments;
4. Collection policy - certain procedures for the control of receivables and the procedure for actions in cases of delays in payments should be established;
5. Incentives that may be offered to customers to expedite payment of bills (usually discounts).
In conditions developed countries the seller will rely on knowledge credit history client, to study financial reporting customer, etc. In domestic conditions, the main sources of information about the creditworthiness of customers are
· Own experience of the company
· Information from confidential sources - for example, a bank where a potential client is served.
· Information from supplier firms that have already worked with this client.
For large contracts, it is possible to conduct special investigations by the security service.
Analysis current situation in Russia shows that spontaneously, on the basis of the interaction of market factors, domestic enterprises develop their own credit policy, already quite comparable with the one that has developed in countries with developed market economies. The result is the establishment of a certain balance between sales on a prepaid basis, with payment after the fact and with a deferred payment - a balance, the violation of which in one direction leads to a drop in sales, in the other direction to an unjustified increase in the risk of non-receipt of payment.
Inventory Management
Inventory management of the enterprise is the responsibility not so much of the financial as of the production manager. However, due to certain traditions, as well as the fact that many small and medium-sized firms simply do not have inventory management specialists, this function is often assigned to the financial manager. In addition, even in the presence of an advanced inventory management service at the enterprise, the financial manager remains an extremely important and non-trivial side of the problem - the assessment of the cost of investments in inventories. It is the accounting of the cost of investments in inventories that radically distinguishes modern models managing them from traditional rationing procedures.
From the point of view of financial management, the management of investments in inventories has certain specifics compared to the management of, for example, investments in fixed assets. These features, in particular, are expressed in the following [ Levy, Sarnat]:
· In practice, as a rule, it is impossible to unambiguously assess the profitability of investments in stocks; as a consequence, the main goal of inventory management is to minimize the costs of maintaining them;
· Decisions related to inventory management are repetitive; these decisions determine how often and how much inventory must be updated.
The decision regarding the optimal level of inventory should be based on a trade-off between the costs of maintaining an unreasonably high level of inventory and the risk of downtime and delays in production and sales of products due to their depletion.
Not having in mind to give an overview of existing methods and models of inventory management (this is the subject of a separate course), we will focus on the classification of costs associated with inventory and formalize the most well-known management model.
The first group includes costs that increase with an increase in inventory:
· The cost of financing investment in reserves;
The cost of storage
· Processing costs (relocation, delivery to places of sale, etc.);
· Inventory insurance;
· Property tax;
· Obsolescence and loss of value.
Costs that decrease with an increase in inventory (per one unit of inventory) can be summarized in three subgroups:
· Costs of placing an order (fixed per order);
· Loss of discounts provided depending on the volume of purchases;
· Costs of possible depletion of stocks.
The most well-known inventory management model that implements the trade-off formulated above is famous model EOQ(Wilson formula), according to which the optimal order size Q* is
Q* = 2SC2 (8.8)
In formula (8.8) through S the annual requirement for stocks is indicated (in units), through From 1- variable costs per unit of inventory, through From 2- fixed costs per order.
Literature
1. Brigham Y., Gapensky L. Financial management: Full course. In 2 volumes. T.2 / Per. from English. ed. V.V. Kovaleva. - St. Petersburg: School of Economics, 1997.
2. Van Horn J. Fundamentals of financial management: TRANS. from English / Ed. I.I. Eliseeva. - M.: Finance and statistics, 2000.
3. Kovalev V.V. Introduction to financial management. - M.: Finance and statistics, 2004.
4. Financial management: theory and practice: Textbook / Ed. E.S. Stoyanova. - 5th ed., revised. and additional - M .: Publishing house "Perspective", 2000.
5. Cheng F. Lee, Joseph I. Finnerty. Corporate finance: theory, methods and practice. Per. from English. - M.: INFRA-M, 2000.
6. Shim Jay K., Siegel Joel G. Financial management / Translated from English. - M.: Information and publishing house "Filin", 1996.
7. Levy H., Sarnat M. Principles of Financial Management. – Prentice Hall, Englewood Cliffs, 1988.
To ensure effective cash flow management in foreign practice, the Baumol model and the Miller-Orr model are most widely used.
The first was developed by W. Baumöl in 1952, the second by M. Miller and D. Orr in 1966. The direct application of these models in domestic practice is still difficult due to insufficient the development of the securities market, so we will only give a brief theoretical description of these models.
Baumol model
It is assumed that the enterprise starts working with the maximum and expedient level of funds for it and then constantly spends them over a certain period of time. The company invests all incoming funds from the sale of goods and services in short-term securities. As soon as the cash supply is depleted, i.e. becomes equal to zero or reaches a certain predetermined level of security, the company sells part of the securities and thereby replenishes the cash reserve to its original value. Thus, the dynamics of the balance of funds on the current account is a "sawtooth" graph.
Rice. 6.3.
So, in accordance with the Baumol model, cash balances for the coming period are determined in the following amounts:
- a) the minimum cash balance is assumed to be zero;
- b) the optimal (aka maximum) balance is calculated by the formula
where DAmax - the maximum balance of funds in the planning period; Рк - the average amount of expenses for servicing one operation with short-term financial investments; Oda - the total expenditure of funds in the coming period; SPKfv - the interest rate on short-term financial investments in the period under review;
c) the average balance of funds in accordance with this model is planned as half of their maximum balance (DAmax: 2).
Miller–Orr model is a more complex option for calculating the optimal amount of cash balances. The model is based on a certain unevenness in the receipt and expenditure of funds, and, accordingly, their balance, and also provides for the presence of an insurance reserve.
The minimum limit for the formation of a cash balance is taken at the level of the insurance balance, and the maximum limit is three times the size of the insurance balance.
The logic of actions of the financial manager to manage the balance of funds on the current account is shown in fig. 6.4 and is as follows - the balance of the account changes randomly until it reaches the upper limit. As soon as this happens, the enterprise begins to acquire a sufficient amount of securities in order to return the stock of funds to some normal level (point of return). If the cash reserve reaches the lower limit, then in this case the company sells its securities and thus replenishes the cash reserve to the normal limit.
Rice. 6.4.
When deciding on the range of variation (the difference between the upper and lower limits), it is recommended to adhere to the following policy: if the daily volatility of cash flows is large or the fixed costs associated with buying and selling securities are high, then the company should increase the range of variation, and vice versa. It is also recommended to reduce the range of variation if there is an opportunity to generate income due to the high interest rate on securities.
In accordance with the Miller-Orr model, cash balances for the coming period are determined in the following amounts in several stages.
- 1. The minimum amount of funds (He) is established, which it is advisable to constantly have on the current account.
- 2. According to statistical data, the variation of the daily receipt of funds to the current account is determined ( V).
- 3. Expenses (Рx) for keeping funds on the current account and expenses (Рт) for the mutual transformation of funds and securities are determined.
- 4. The range of variation of the cash balance on the current account is calculated ( S) according to the formula:
5. Determine the upper limit of cash on the current account (), above which it is necessary to convert part of the cash into short-term securities:
6. Find the return point (TV) - the value of the balance of funds on the current account, to which it is necessary to return if the actual balance of funds on the current account goes beyond the interval ():
On the first At the stage, ten-day periods for spending funds (in relation to their receipts) are regulated, which allows minimizing the balance of monetary assets within each month (quarter).
On the second stage, the size of the average balance of monetary assets is optimized taking into account the provided reserve stock of these assets. At the same time, the maximum balance of monetary assets is first determined, taking into account the unevenness of payments and reserve stock, and then their average balance (half the sum of the minimum and maximum balances of monetary assets).
The amount of monetary assets released in the process of adjusting the flow of payments is reinvested in short-term financial investments or in other types of assets.
Ensuring the acceleration of the turnover of monetary assets determines the need to search for reserves of such acceleration in the enterprise. The main of these reserves are:
- a) accelerating the collection of funds, which reduces the balance of cash assets on hand;
- b) reduction of cash settlements (cash settlements increase the cash balance and reduce the period of using own funds for the period of processing of payment documents of suppliers);
- c) reducing the volume of settlements with suppliers using letters of credit and checks, since they divert monetary assets from circulation for a long period due to the need to pre-reserve them in special bank accounts.
Security effective use temporarily free balance of funds can be implemented through the following activities:
- a) agreeing with the bank on the conditions for the current storage of the balance of funds with the payment of deposit interest;
- b) the use of highly profitable short-term stock instruments to place a reserve of monetary assets, but subject to their sufficient liquidity in the stock market.
Minimization of losses of used funds from inflation is carried out separately for funds in national and foreign currencies.
Anti-inflationary protection of monetary assets is ensured if the rate of return on the temporarily free balance used is not lower than the inflation rate.
Cash balance optimization (Baumol model)
One of the main tasks of managing cash resources is to optimize their average balance. This is the total balance bank accounts and at the box office). First of all, the question arises: why does cash remain free, and is not used in full, for example, for the purchase of securities that generate income in the form of interest. The answer is that money has absolute liquidity compared to securities.
The financial manager is faced with the task of determining the size of the cash reserve, based on the fact that the price of liquidity does not exceed the marginal interest income on government securities.
Thus, the model policy for absolutely liquid assets in the conditions market economy is. The company must maintain a certain level of free cash, which is supplemented for insurance by a certain amount of funds invested in liquid securities, that is, in assets that are close to absolutely liquid. If necessary or with some frequency, securities are converted into cash; when accumulating excess amounts cash they are either invested on a long-term basis or in short-term securities, or paid out in the form of dividends.
From the standpoint of the theory of investment, cash is one of the special cases of investing in inventory. Therefore, the general requirements apply to them:
A basic cash reserve is needed to perform current calculations;
Some funds are needed to cover unforeseen expenses.
It is advisable to have a certain amount of free cash to ensure a possible or predictable expansion of their activities.
The complexity of optimizing the level of the average cash balance of an organization is due to the dialectical contradictory unity of its goals, which consists in the need to simultaneously maintain high business activity and a stable financial position.
The essence of this contradiction is also manifested in the contradictory unity of requirements for the optimal level of cash balance in the short and long term.
In the short term, from a liquidity standpoint, it is necessary to maximize cash balances (to maintain solvency); from the standpoint of business activity - minimization (money must change its physical form into a commodity one, then it becomes capital and can make a profit). With this approach, it is clear that in the long run, liquidity and business activity are inseparable. Sufficient business activity is the reason for generating financial result, which means an increase in the balance of funds, hence solvency. Only sufficient solvency makes it possible to finance a continuous production process in a timely manner and in the required amount.
In the theory of financial management, there are two methods for determining the optimal amount of cash: the Baumol model and the Miller-Or model. We will consider the Baumol model.
Under the Baumol model, it is assumed that the enterprise starts working with the maximum and expedient level of funds for it, and then constantly spends them over a certain period of time. The company invests all incoming funds from the sale of goods and services in short-term securities.
As soon as the cash reserve is depleted, that is, it becomes equal to zero or reaches a certain predetermined level of security, the company sells part of the securities and thereby replenishes the cash reserve to its original value.
According to the Baumol model:
1) the minimum balance of monetary assets is assumed to be zero:
2) the optimal (aka maximum) balance is calculated by the formula:
where V is the projected need for funds in the period (year, quarter, month);
c - expenses for converting cash into securities;
r - acceptable and possible interest income for the enterprise on short-term financial investments, for example, in government securities.
For the enterprise, the optimal balance of funds is the amount of 220857 rubles.
Thus, the average stock of cash is Q/2,
The total number of transactions for the conversion of securities into cash is equal to:
The total cost of implementing such a cash management policy would be:
The first term in this formula is direct costs, the second is the lost profit from keeping funds in a checking account instead of investing them in securities.
ST \u003d 13785 * 104 + 13 * 110428.5 \u003d 1433640 + 1435570.5 \u003d 2869210.5 rubles
The costs of implementing this policy amounted to 2,869,210.5 rubles.
The disadvantage of the model is that it poorly describes the situation of return of funds from short-term financial investments.
There is no single way to determine the optimal cash balance. The compromise solution depends on the money management strategy. With an aggressive strategy, the priority is business activity, and with a conservative one, a sufficient value of indicators financial condition characterizing liquidity, solvency and financial stability.
Baumol's model is simple and quite acceptable for enterprises, cash expenses which are stable and predictable. In reality, this rarely happens - the balance on the current account changes randomly, and significant fluctuations are possible.