Goal of WC Management?
To achieve balance between Liquidity and Profitability
Formula for Baumol Model or Optimal Cash Balance to determine amount of cash to maintain?
Square Root of :
2 ✖️Demand ✖️Transaction Cost ➗Carrying Cost
Demand = Cash Required
Carrying Cost = Interest Rate
Types of Negative Float
Mail - not yet received
Processing - not yet deposited
Clearing - not yet cleared
How to manage float in cash?
Positive - Maximize
Negative - Minimize
How to get total cost of cash?
= TC ➕ HC
TC = Cash Demand ➗OCB ❌ Fee
HC = OCB ➗2 x Interest
Reason for Holding Cash
Transaction - facilitate normal trans.
Precautionary - for contigencies
Speculative - for investments
Contractual - for contracts
How to get EOQ and Reorder Point
EOQ = Baumol Model
Reorder Point = days of delivery ❌ sales per day
Total Cost of Inventory
= TC ➕ CC
TC = Inventory Demand ➗ EOQ ❌ TC
CC = EOQ ➗ 2 x CC
Cost of Giving Up Cash Discount?
= Discount Rate ➗ 100% less discount rate ❌ 360➗ n
n = credit period - discount period
Effective annual interest rate?
Note: Annualized always
= Finance Charges ➗ Usable Proceeds
