Managing cash assets

Financial management

The objective of monetary assets is to ensure permanent solvency. The objects of financial management is the money (in cash, in bank accounts in the way) and their reserves in the form of investment in the current financial instruments and cash securities.
From the standpoint of the theory of investment funds - is a particular type of investment in inventories and therefore management should be on the following general principles:
- Maintaining a minimum cash balance for smooth implementation of current accounts;
- Consideration of a range of seasonal changes in cash balance;
- Creating a pool of funds available for a possible expansion of their business;
- Formation of reserve funds to compensate for unforeseen expenses and possible losses during the financial and economic activities;
- The timely transformation of free funds in highly liquid financial instruments and their inverse conversion to replenish the cash balance.

An important objective is to support management of funds on a minimal scale. This can be used to replenish all possible sources of funds:
1. Receipt of proceeds from sales under the terms of immediate payment.
2. Recovery of receivables.
3. Sale of reserve cash assets in the form of current financial investments.
4. Sale of tangible and intangible assets of the business (inventory, fixed assets, unfinished production, patents, know-how, etc.).
5. Obtaining bank loans.
6. Attracting investment by issuing shares, bonds, shares more and more.
Moreover, the first four ways to replenish the cash balance is more appropriate because it does not lead to an increase in the balance sheet. In these cases, the funds generated by the restructuring of assets. By contrast, the last two methods can be used to support current solvency only in extreme cases, since they lead to diversion of resources mobilized intended use.


According to this formula, there are two main ways to reduce the minimum cash balance:
- Firstly, by optimizing the payment transaction;
- Secondly, by accelerating the turnover of funds.
Optimize payment transactions the company can by adjusting the flow of payments, the introduction of austerity, reducing the need for financial resources. The main measures of normalization of payments include:
- Elimination of extra payments for raw materials, heat, water and energy by making them more economical and rational use;
- Optimization of the tax base of income;
- The acquisition of the necessary enterprise fixed assets on loan and leasing;
- The purchase of inventory on deferred payment terms;
- Extension of loans and defer some payments under the arrangement with suppliers and others.
However, the reduction of payments should not adversely affect the financial and economic activities and to limit quantities.
To speed up the turnover of funds can not due to:
- Reduce the length of operational and financial cycles;
- The timely collection of revenue;
- Reduction of cash payments;
- Reducing the share of payments to suppliers forms that require temporary reservation of funds in bank accounts (letters of credit, checks) and so on. Al.
The task of improving the use of funds can be achieved by investing in highly liquid financial instruments (cash and stock). However, the company can go to the store temporarily free funds in bank accounts combined.
Thus, the current account account makes it possible to combine the current deposit money with the company paying the deposit rate. Its application is very convenient and allows you to not only provide protection protyinflyatsiynyy monetary assets, but also increase the profitability of their use.
Another aspect of efficiency of monetary assets is to minimize the total cost of their maintenance and inverse conversion of short-term investments at the ready means of payment.

We solve this problem by using the optimal size of the cash balance. To this end, the international practice of financial management uses quantitative models of Baumol and Miller-Orr.
Model Baumol
Model Baumol model similar to inventory management and Wilson used when due to the uncertainty of future payments is difficult to develop a detailed plan of income and expenditure of funds. According to this model, the replenishment of funds by converting highly liquid securities must exercise at a time when stocks hit your cash.

Interest rate Baumol model characterizes the possible (alternativ) costs or lost profit due to the conversion of short-term investments to cash. A higher value of interest rate reduction requires optimal cash balance. Typically, when the interest rate is high, companies are trying to have as little cash balances in its bank account. On the other hand, if the company has a significant payment transactions and the cost of conversion of securities high, it is better to increase the average balance of cash and transactions with converting less. Thus, as is the case with the model of Wilson, managing cash balances using the model Baumol way to find this optimum value of a single conversion in which minimized the total cost, to perform conversion operations and possible (alternative) costs or lost profit due to withdrawal of investment.
Baumol model works well in an environment where enterprises fully use their cash reserves. But in real life it is not so often. Typically, the process of cash flow is stochastic in nature. In some periods the company can receive significant amounts of paid accounts and therefore has excess cash. At other times, on the contrary, it is necessary to pay off creditors and spend significant amounts of money.
Model Miller - Orr
The answer to the question of how to manage the stock of money, if you can not accurately predict their daily arrival and departure, the model gives Miller - Orr.

According to the model Miller - Orr necessary to determine:
- Lower threshold or minimum cash balance;
- Point of return or the optimal cash balance;
- Upper limit or maximum cash balance.
If at some point in time due to substantial ongoing cash receipts to balance reaches the upper threshold, the company must immediately convert part of funds in financial instruments (deposits, securities) and reduce its cash balance to the optimum level (point return).
Conversely, when the significant outflow of funds of the current account balance reaches the lower threshold, the company must make a reverse conversion of financial instruments in cash to the extent to return to an optimal level of cash balance (point return).
Thus, the money manager oversees the free movement of cash flows and does not interfere in this process as long; while cash balance reaches a dangerous level (minimum or maximum).
The algorithm model Miller - Orr follows:
1. Determine lower limit cash balance at minimal production needs with the requirements of the servicing bank to the minimum balance on current accounts.
2. The variance is estimated cash flows based on the analysis of daily fluctuations. You can record revenues and expenditures of funds within 100 days, and then calculate the variance based on a sample of 100 observations (with significant seasonal fluctuations in cash flows used more sophisticated methods of evaluation).
3. We estimate the value of the interest rate conversion and cost per transaction.
4. Determine the distance between the upper and lower thresholds cash balance. If the daily fluctuations in cash flow or the substantial costs of conversion of securities into cash is large, then the matches for control thresholds (upper and lower) are far apart. Conversely, if the interest rate is high, the gap between the upper and lower thresholds to be negligible.

As international experience shows that for large firms operating expenses amount for conversion is not as important as possible (alternative) costs of storage free cash balance. Thus, if the company received for up 5 million, and the interest rate is 15% per annum, or approximately 0,041% during the day, the value received on the day of interest on the full amount will be 2050 USD. Even if operating costs are high and the conversion of 200 USD per transaction, the company will pay them better to buy highly liquid government securities today and sell tomorrow than hold 5 million USD in the form of free money. Of course, this tactic is appropriate only in a stable and liquid market securities.
If the enterprise is a need to cash in the short term, and convert financial instruments is difficult or expensive, can take short-term bank loan. But it must take into account that bank interest rate will be higher than the percentage that can be accessed securities.
Financial managers of the company always faced a dilemma. After all, in order to increase the profitability of using cash assets necessary to maintain the balance of funds to a minimum and increase the current volume of financial investments. But this increases the likelihood of the need for short-term bank loans to make contingency payments.
Expenses on cash balances - interest those that are lost if not invest free funds in securities. Yes, if the expected rate of return on the securities is 18%, while short-term bank loan could take 22%, then reduce the cash balance by buying securities advisable until the probability of the need for short-term loans did not reach significance 0.82 ( 18: 22).
That is, if short-term loans much more expensive compared with the expected yield securities, financial manager must be sure that the need for additional loan does not arise.
Feeling confidence in future cash flows can keep a lower cash balance in current accounts. Conversely, if there is a significant amount of uncertainty of future cash flows, it is advisable to keep a large cash balance to be sure that the bank loan is not needed.