CHAPT-ER. Models for the Management of Cash And Temporary Investment This is the final chapter concerning the management of cash and marketable securities. In Chapter 2. we discussed the gathering and disbursing of cash by the firm. In Chapter 3, we discussed cash forecasting. the temporary investment of cash, and the hedging methods that the firm can use to address the risk inherent in its forecasts of cash flows. This chapter. Chapter 4. has two purposes. First. we discuss models to decide whether it is worthwhile to make short-term investments of cash and to make strategic decisions regarding such investments. Second, we review survey evidence regarding the actual Practices used by financial managers in the management of cash and temporary investments. IS IT WORTHWHILE TO MAKE A SHORT-TERM INVESTMENT? In the prior two chapters, we discussed strategies for (1) the investment nporary surpluses of funds until they are needed, and (2) the use of short-term investments as interest-bearing repositories for funds kept as re serves zgainst cash flow shortages. In this discussion, we deemphasiced the role of the transactions costyof investing and disinvesting in these investment strategies. In general, 1 was assumed that the amounts involved were sufi ciently large and the tie of investment sufficiently tong that transactigns costs were very small in comparison to investment income. For example. in Chapter 3 we discussed cash forecasting, and concentrated on the monthly cash forecast, For most firms, surplus cash that is available for more than a month can be profitably invested. For investments ofthis Juration, the period of investment is sufficiemtly long that tae interest income from the invesigent will far outweigh the costs of making and withdrawing that investment Hoxever. the predominance of investment income over transaction costs of tnotes for the Management of Cash and Temporary Investments 125 acinvestment docs not hold if the amounts of funds are small or the periods ay envesermecnt are very short Bor example. assume that the total costs of “vesting ane chisinycsting are $80, and that the monthly interest rate 1s 6 gro (2.02 pereeat per day). Ila tem had $100,000 to invest for a month would BC profitable to make the investment, the interest income of $600 would {30 owoweih the transaction costs of investment and disinvestment put f the fm had the funds for only two days. it would be better not to jest, the taterest income of $40 would be less than the $100 total cost of makings and withdrawing the investment. Since many firms have small sur pluse ailable for short periods of time, a set of models is needed to address temporary investment decisions for circumstances where transactions Casts play an important part In this chapter. we discuss four models that provide strategics in these circumstances These models are named after their authors: the models are the Baumol model, the Beranek model, the Miller-Orr model. and the Stone model. Each of these models provides optimum strategies for a given ume pattern of cash flows. Each model assumes a particular pattern of future cash flows and develops an optimum strategy for investment and disinvestment for that assumed pattern based on the trade-off between investment income and transaction costs. While these models provide interesting and useful approaches. their limitations must be stressed. Like all optimization models. their domain is constrained by the a:sumptions made in their derivation. While all medels are robust to deviations from these assumptions to a greater or lesser extent, the use of an optimization m@del outside its intended domain is dangerous, and may lead to uneconomical and perhaps disastrous results. Thus, it makes. good sense 10 pay close attention to the assumptions and derivation of a model in deciding whether to use that model in addressing a particular man- agement decision THE BACMOL MODEL In this model. the firm is assumed to receive cash periodically but to pay out cash continuously at a steady rate ' That is, the firm's inflows are lumpy but its outflows are not. This time pattern of cash balance 1s portrayed in Panel A of Figure 4-1. When fhe cash inflow is received, the firm puts enough cash in its disbursement accoum to cover outfiows until the next inflow is received. There are several types of businesses that experience a time pattern of cash flows similar to this. For example, for tirms that manage rental ‘See Willlam Baumol, “The Transactions Demand for Cash. An Inventory Theoretic Approach.” Quarterly Journal of Economics (November 1952), pp 345- 4Pena A No Transactions Strategy | y “Time Panel B Two-Transections Strategy: Cash Account Panel C Two-Transactions Strategy: Investment Account “y Investment Balance Time Figure 4-1. Time Pattern of Cash Balance for the Baumol Model, property, rents are often received over a short period early in the month bu other expenses (such as maintenance) continue evenly throughout the month The Baumol model also makes several assumptions about the firm's situation. It assumes that investments yield a fixed rate of return per period, regardless of the length of the investment (that is, it assumes that yield cune effects are small over the time period of investment). This is an appropriate assumption if the firm is limited to investments in money market accounts, negotiated order or withdrawal accounts, or similar small-dollar investments. The model assumes, as do all the other models discussed in this chapter, that all the out-of-pocket costs of making or selling the investment: commissions. Postage, telephone charges, the Opportunity cost of diverted managerial ef fort, and so forth. “Situations where the transaction cost of investing is variable in the amount of the investment are addressed in mathematical Programming madels of investmen such as Gary Eppen and Eugene Fama, “Cash Balance and Simple Dynamic Pottl® Problems with Proportional Costs," International Economic Review (June 1968). 3% Hans Dallenbach. “A Stochastic Cash Balance Model with Two Sources of Sho" ‘Term Funds," International Economic Review (June 1969) Zlfor the Management of Cash and Temporary Investments 127 Models Given that the firm has periodic inflows and steady outflows, what is ppropriate strategy for investing the funds until they are needed? This oa the question addressed by the Baumol model To understand the trade is ffs in this situation, let us evaluate some possible strategies. One possible ° strategy 1S 1. When the cash inflow is received, invest one-half of the total inflow, put the remaining one-half in the disbursement account 2. During the first half of the period, pay disbursements from the dis- bursement account. This account will be drained one-half of the way through the period. At that time, sell the investments and place the resulting funds in the disbursement account 3. Use these funds to pay disbursements during the remainder of the period This is called the two-transactions strategy because it involves one in- vestment of funds and one disinvestment of funds. The effects of this strategy on the cash anid investment accounts is portrayed in Panels B and C of Figure 4-1. To see the net gain from this strategy, let Y be the amount of the cash inflow and i be the interest rate per period (that is, the interest rate from one periodic cash inflow to the next). Since in this Strategy one-half the inflow is invested for one-half the period, the interest incomé is: Investment Income = (1/2)(1/2)i¥ = (1/4)iY (4-1) But there are two transactions in this strategy: one investment and one dis- investment. If the cost per transaction is a, the transactions cost of this strategy is 2a, and the profit is: ‘ Profit = (1/4)i¥ — 2a (4-2) While the simple two-transactions strategy captures one-half of the cash inflow into the investment account for one-half the period, other strategies will capture more of this flow for longer periods and thus earn more interest. Consider the three-transactions strategy: 1. When the cash flow is received, initially invest two-thirds of it. Place the remaining one-third in the disbursements account. 2. One-third of the way through the period, the disbursements account will be exhausted. At this time, disinvest one-half of the funds in the investment account [the amount is (1/2)(2/3)¥ = (1/3)¥] and put this in the disbursement account. Leave the remaining (1/3)Y in the investment account. 3. Two-thirds of the way through the period, the disbursements account will again be exhausted. Disinvest the remaining (1/3)Y in the in- vestment account and move the proceeds to the disbursement ac-Choy 128 ‘i through the re, count. This will fund d sbursements B Mander of . period This suategy invol es one investine nt transaction and WO dsinves, transactions, The balances in the investment and disbursement accounts portrayed in Figure 4-2, Thiy steat captures 3 ZFeAleF POFTION OF the ingt account. Two-thirds of the initial cash in cash inflow in the investment 3 resides in the investment account for one-third of the pertod (unnt the fj hinflow resides mn the investment axe (until the second withdraw) a withdrawal) and one-third of the cas! for the second one-third of the period interest income is then Interest Income = (2/3) (1/3¥¥+ 0/3) T/32F = (U3) gy ) And since there are now three transactions, the profit is . Profit = (1/3)'Y - 3a ofit = (1/3) (44) Whether the three-transactions strategy is more profitabie than the tw transactions stratees depends on the amount of additional interest phi versus the additional transaction cost paid. The Baumol mode! addresses the question of the optimal strategy by deriving a general expression ie the optimal number of transactions for a firm with periodic inflow and Steady outflows. In general, the interest income from investment strategies in thi = ths situation is. Interest Income = [(n=1)/2n}¥ us >) Figure 4-2. Time Pattern of Cash Balance for the Baurmoi Model Three Transactions Strategy ‘Three-Transactions ‘Swategy: Cash Account Cash Balance Thvee-Transactions Strategy, lnvestment Account hy Investment Balance |for the Management of Cash ang Temporary Investments BY te wear, — \\ Numbor of Tranaactiong ae Faure 43. Costs and Revenues versus Number of Transactions for the Baumol Model. where nis the number of transactions. The student may verify that this expression gives the proper income for the two- and three-transactions strat- egies. Since the transactions cost is na, the profit for n trans: actions is: Profit = [(n=1)/2u]i¥ ~ na (4-6) As the number of transactions increases, the interest income increases but so does the total transactions cost. This relationship is plotted in Figure 4-3. Since the total interestincome is limited to capturing the entire initial cash inflow in the investment account, which would result in an interest income of (1/2)/Y. the interest income is asymptotic to this level.? For some level of n, the profit (equal to the vertical distance between the cost and interest income functions) is at a maximum. To find this, we take the first derivative of the profit function [equation (4-6)}, set this equal to zero, and solve for the optimal n. The result is: n® = (1Y/2a)'? (4-7) where n* is the optimal number of transactions. In the Baumol model, the firm will always make one deposit and n* — 1 withdrawals from the investment account. The amount of the initial deposit will be ((n* — 1)/n*]¥; the amount of the withdrawals will be (1/n*)Y. The profit from this strategy can be computed via equation (4-6). An exainple in the use of the Baumol model is in order. A firm runs an apartment complex. Cash comes in at the beginning of the month (from sental payments) and is disbursed uniformly throughout the following month, For the upcoming month, the firm expects to have cash expenses of $250,000. *This occurs because: lim (n-1)2n\i¥ = 121 ano nt130 hn : an carn 0.5 perce sney market account, it can ¢ A peg By investing im a Money Sa at $80 per transaction, What i 4p my ansactions costs are est : ary © first Trans Vestment strategy and how much will this earn is best a formulate this strategy. the opto number Of taNSaet mAs iy Hane : ny computed n= (¥/2a)'? = [(0.005) (250,000) (250)? = 5.9 : 2 2 : The five-transactions strategy is optimal; there should be one deposit an four withdrawals from the investment account, The amount of the inns deposit will be (4/5) ($250,000) = $200,000; each of the four ithdrana will be $50,000, as will the initial deposit in the disbursement account. nh This €Stmen, h, igh, Strategy initial deposit will fund the firm for one-fifth of the month (50,000/259 or about six days; then the first withdrawal will be made from the iny account. Withdrawals will occur every six days (on the sixth, twelft! teenth, and twenty-fourth days of the month). The profit ftom this will be " Profit = [(n—1)/2n]i¥ ~ na (5 ~1)/2(5) (0.005) (250,000) ~ 5(50) 500 — 250 = $250 u W (4-9) Like all the models in this chapter, the applicability of the Baumol Model is limited to situations where the cash flow pattern fits that assumed in the model's derivation. Other patterns are addressed by other models, such as the Beranek model, which is discussed in the next section. THE BERANEK MODEL Beranek hypothesized firms where the cash inflows were steady, but the outflows were periodic.‘ This is the mirror image of the time pattem of cash flows within the Baumol model, where inflows were periodic and outflows were steady. The time pattern of cash balances in the Beranek model is Pictured in Panel A of Figure 4-4. Balances build over time, then are disbursed all at once. This time pattern represents the situation faced by many firms. For example, a firm that ships and bills uniformly throughout the month on net 30-day terms but which writes checks only a few times per month would experience this pattern. Cash would be collected continuously at a uniform rate, but would be disbursed over a short time as a oe isa hecks Teached its bank and were paid, group of the firnt’s cl “See William B : ofeee Management of Cash for the and Temporary Investments it yosels Panel A No-Transactions Strategy Time Panet 8 ‘Two-Transactions Strategy: Cash Account Cagh Balance ”Y Time Panel C Two-Transactions Srategy: Investment Account wy Investment Balance Time Figure 4-4. Time Pattern of Cash Balance for the Beranek Model. In this pattern of cash flows, the challenge is to profitably invest the funds between the time of their receipt and the time when a group of checks are presented to the bank for payment. The trade-off between interest income and transactions expense and the strategies employed are parallel to those of the Baumol model. For example, the firm could wait until one-half of the incoming cash has been accumulated, then invest this cash until the end of the period when it is needed. In this two-transaction strategy (see panel B of Figure 4-4), the interest income would be (1/4)iY, as in the Baumol model, and the transaction expense would be 2a. The formula for the optimum Sumbet of transactions is the same as that for the Baumol model, and is given in equation (4-7). In the Beranek model, however, the cash ix accumulated Sradually (rather than disbursed gradually), so the transactions pattern would Involve a series of investments followed by one disinvestment at the end of the Denod,132 Sw Totus try an example. A finns receives $100,000 per day. which it to make disbursements and follows a policy of wating chec every two weeks. Over & two-week period. it accumulates $1400 000. It can crest rate of 6.825 percent per year (02625 prereent for twa vol investment OF disinvestment is $47 50) What follow and how much wall this strategy eventually need invest at an int weeks) The transaction cos javeatment strategy should the firm earn” From equatic yn (4-7), the optimal number of transactions is i ree 4(0.002625) (1.400.000)/20 50)'" = 7.0 (4-10) these seve transactions consist of six deposits and the Beranek model. ; In the Beranek reer unt of the final withdrawal is: one withdrawal The amou! [Qn iyvaly = 6/7 (1,400,000) = $1,200,000 (411) The amount of the periodic investments will be (1/n)Y, oF $200,000. The initial investment will require two days to accumulate. and will be made at the end of the second day. The other investments, in the same amount, will he made at the end of the fourth, sixth, eighth, tenth, and twelfth days. The ted balance of $ ),000 will be withdrawn on the fourteenth day, sh accumulated during days 13 and 14, will constitute the $1.4 “nitlion needed to cover the checks presented t the bank ‘at that time. From suanon (4-6), the profit from this strategy will be: J with the 2 profit = [(v= D)/2a}i¥ ~ na 7 —1)/207))0 (102625(1 400,000) ~ 7(37.50) ( 1575 — 262.5 = SU312.50 (4-12) While they address parallel time patterns of cash flow, neither the Bau mol nor the Beranck models deal with risk: they both assume that the amounts of cash inflows and outflows are known with certainty. In using these models, the firm must use a hedging strategy similar to those outlined in the prior chapter to deal with cash flow uncertainty For exaniple, a firm facing the cash flow pattern in the Beranek model might keep a reserve of cash. If cash inflows then turned out to be less than expected for a particular part ot the period. the firm could temporarily diaw from the cash reserve to make de- posits of economical size The remaining two models presented in this chapter (the Miller Or moucl and the Stone model) do not require these additional hedges. Inve" they corporate wacertainty explicitly within the strategies which they deespoaets for We Management of Casn ana temporary Investinents 199 THE MILLER-ORR MODEL Asuna the prior two models, Miller and Orr assume that the yield curve for investments made via their model is flat and that there isa freed cost of investing. and disinvesting that does not vary with the amount of investment ordisinvestment” They also assume that investments and disinvestinents can jake place instantaneously and that there is a lower limit below which the farm's cash balance ts not to fall. This lower limit is set by management and js not determined within their model; it may be a zero cash balance (so that the firm does not overdraft) or the firm's minimum compensating balance The major difference between the Miller-Orr model and the prior two ynodels concerns the assumed time pattern of cash flows. Baumol and Beranek assume a rise-and-fall pattern of net inflows and outflows. Miller and Orr assume that net cash flows are normally distributed with a mean of zero, that the standard deviation of this distribution does not vary across time, and that there is no correlation of the cash flows across time. Under these assumptions. cash flows must follow a random walk around a zero average net flow. Based on these assumptions, and using the advanced mathematical technique of stochastic calculus, they formulate a profit-maximizing strategy based on con- trol limits : This control-limits approach involves exactly the same decision rules as does the centrol-limits approach in production management theory. In pro- duction management theory, a production process is initially adjusted for num performance. However, it is recognized that variations in materials, machine wear, and so forth will cause random fluctuations in the output of the process. Since it is costly to adjust the process. control limits are set up based on the expected variation in the process. Only when these limits are breached is the process adjusted. The Miller-Orr cash management model is basically an application of controb-limits theory to the cash investment ¢ cision. Control limits are set up using a formula derived by Miller and Orr When the firm’s total cash goes outside the upper control linir, investments ure made to bring the cash balance back down to the refcrn point: when the firm's cash balance goes below the lower control limit, disinvestments ae made to bring the balance back up to the return point. The formula developed by Miller and Orr is: opt R= (QaV/4i* (4-13) SSee M. H. Miller and D. Orr. A Model of the Demand for Money by Finn Quarterly Journal of Economics (August 1906), pp. 413-35 For an interesting cussion of the relationship between the Baumol and Muller-Ore models, see B.D Bagamety, “On the Correspondence Betwcen the Baumol “Tobin and Miler Oa Op timal Cash Balance Models,” Financial Review (May 1987), pp. 3.5i Chapter 4 where V is the variance of daily cash flows, €i8 the daily interest pag. Parag the transactions Cost of investing oF disinvesting in 4 ement), he Optinul return poiny fy IMLS R 4 by mana trod Limit ts te aL ywould word in prtetice let us address an exampy that its cash flows satisfy the nee ve we will discuss later) Ttean enn, ore Based on historic data. the firm hee vif ats daily cash flows at $50,000 and jn, isinvestment at $45.00. It wishes to main ),000 at all times Based on this data, the investments, ane is the flower control tint (se! 7 and the optimal upper cer To sce how this moc A firm has confirmed problem i by procedure of the Miller-Ore model ( 0.02 percent per day 10 investme estimated the standard deviation transaction costs of investment or dl tain a minimum cash balance of $100 R statistic would be calculated as: R = (3aV/4)"" = 13(45)(50,0002)/4(0.0002)]"* = $75,000 (4-14) ic, the firm would set the lower control limit at $100,000, shoo and the upper control limit at $325,000 (3(75,000) ‘ects of this strategy for some example cash k the effe m’s starting balance was $150,000 and the following Using this statisti the return point at + 100.000). Let us trac’ flows. Assume that the fir cash flows occur: Net Cash Flow Day 1 $25,000 2 $75,000 3 $100,000 4 $25,000 5 $125,000 the return point, and the effects of these cash flows are portrayed in Figure 4-5. At the end of day 1, the cash balance would be $125,000; since this is between the control limits, no action would be taken At the end of day 2, however, the cash balance would be reduced to $50,000 if the firm did nothing. Since this is below the lower control limit, the firm would disinvest sufficient securities to get back the return point. In this'case. a disinvestment of $100,000, equal to the return point of $150,000 less the ending cash balance of $50,000, would be made and the firm would start day 3 at the return point. At the end of days 3 and 4, the cash balance would be $250,000 and $225,000 respectively, but no action would be taken since these balances are within the control limits. However, during day 5, $125,000 Eon autie ed ae if no action is taken. Howevet. noun would Ge a oe sufficient balance to justify investment. and y , bringing the cash balance back to the return point to start day 6. The control limits,models (Or the Management of Cash and Temporary Investments 195 ~== UCL 325 I ——- Return Font = 175 Day Figure 4-5. Cash Balances for Miller-Orr Example. Concerns About the Assumptions of the Miller-Orr Model While the Miller-Orr model has intuitive appeal as a control-limits approach, the time pattern of cash flows hypothesized within the model has been subject to substantial criticism. The random walk nature of this time pattern assumes. that management has no knowledge at all about the direction of future cash flows; in reality, management may forecast these flows, but with a substantial error component within the forecast.° Also, while existence of the me pat- terns of cash flows in the Baumol and Beranek models may be suspected by the business patterns and policies of the firm, the assumption of normality in the Miller-Orr model relies on the central limits theorem, and the convergence to normality of a sample under this theorem depends on the shape of the underlying population distribution. Because of doubts about the normality of firms’ cash flows, and about the Milker-Orr assumptions of no correlations in cash flows over time and no changes in standard deviation over time, several researchers in finance have conducted empirical studies of the probability distributions of firms’ net cash flows. These studics have produced mixed results. In their original study, Miller and Orr found that the distributions of cash flows for the Union Tank Car Corporation were more “fat tailed” (had more outlying observations) than would be expected under normality.” Homoaoff and Mullins also found the cash flows to be nonnormal for their sample firm.* Emery tested cash “See Bernell Stone, “The Use of Forecasts and Smoothing in Control-Limit Models for Cash Management," Financial Management (Spring 1972). pp. 72-84. and Hans Daellenbach, “Are Cash Management Optimization Models Worthwhile?” Jour nal of Financial and Quantitative Analysis (September 1974), pp. 607-26 See Miller and Orr, “A Model of the Demand for Money.” "See R. Homonoff and D. W. Mullins, Jr., Cash Management (Lexington, Mass. Lexington Books, 1975).Chapter 4 Table 4-1. Fxxmple Net Cash Flows and Summary Statistic, Day NC} ' 10 2 100 3 200) 4 0 5 two 6 300 7 0 8 200 9 ~ 200 10 —100 Sample Mean ~ 10.00 Sample Standard Deviation 157.80, Standard Deviation for Mean = 0 158.11 flow data from three firms in different industries.? He cash flows from two of these firms were normally di butions changed over time. He also found evidence of correlations in cash flows over time. Further, his s Orr model found that the existence of of this model In summary, these empirical results suggest that a firm should not au- tomatically adopt the Miller-Orr if no discernible time Pattern of cash flows is obvious. Instead, the firm needs to perform statistical tests to assess the agreement between the probability distributions of the firm's c: the distributions assumed in the model. Tests for nonnor correlation of the cash flow over time (autocorrel: to confirm or d found that daily net istributed, but the distri- regarding the existence imulation of the Miller- such a correlation affected the behavior ‘ash flows and mality and for the lation) are generally sufficient this agreement. To illustrate this procedure, let us test the data in Table 4-1 for these two properties.” °See Gary Emery, Flow,” Financial Management (Sp mpirical Evidence on the Pro ring 1981), pp. 21-28. “Tn the following discussion, we treat the test for equality of distribution over time as tested simultaneously with that of normality, since shifting distribution pa- rameters over time would bias the statistical tests against normal: (See Emery, “Some Empirical Evidence,” for di cussion.) We test only for first-order autocorre. lation (correlation between one day’s cash flow and the Next) because chis is the correlation that Emery found to be important Finally, we use an impractically small sample in the interests of simplicity; the chi-square test we use to test for normality requites that the expected number of outcomes in each Tange be greater than five, though it is robust to deviations from this condition, : petties of Daily Cashadeis for the Management of Cash and Temporary Investments 137 Md Summary statistics regarding this distribution of cash lows are presented the bottom of the table. The Miller-Orr model requires that the cash flows at nally distributed With a mean of zer0,"" s0 for testine purposes an mitral standard deviation of [58.1 has been calculated using a zero mean be the other fest staustics will be calculated using a mean of zero To test for normality, the frequency distribution of the sample 1s compared with the frequency distribution that would be expected of a normally distributed sample with the same mean and standard deviation. We will use a chi-square test for this purpose." A test of this sort is illustrated in Table 4-2. To use thi test, the data are first divided up into ranges. This division is rather arbitrary wwe have used four ranges with endpoints of ~ 150, 50, and 250 (four ranges 1s the minimum number for using this test). The upper limits of these ranges arc jn column A. To compare the expected frequency if the distribution is normal with a mean of zero to the observed frequencies, we need to calculate the probability that an outcome will fall in each range. The first range extends from minus infinity to ~ 150. If the mean is zero and the standard deviation is 158.11 {S0 is 0.95 standard deviations to the left of the mean {(- 180-0) /158.11 = 0,95}; cell BS contains “(AS—0)/158.11)." This formula is then copied into cells B6 and B7 to obtain the Z scores for the upper cutoffs for each range (the and Table 4-2. Test for Nennormality for Exemple Net Cash Flows a i B wt € i D at E a F n 1 Upper Zor Prob, Prob. Expected = Actual 2 Cutoff Upper for Upper for: Number Number 3 of Range, Cutoff Cutoff Range . for Range in Range ‘ y 5 wi mui 1 2 i 6 6255 4544 454 5 } 2 188 9 31s 2 > + lof. 1.0000 37 1 y . cceeseeee Totals 1.0000 10.00 10.0 “Alternately, it the tirm has @ positive or negative level of expected cash flows (for example, if it has expected cash inflows of a certain amount per day), it might deduct or add this expected amount from the actual net cash flow during each day and-use the Miller-Orr model to manage the remainder, which would then have a zero mean The net cash flows in Table 4-1 have been adjusted in this way "A more powerful test. particularly for small sam s the Kolmogorov Smirnov goodness-of-fit test {see J. V. Bradley, Distribution-Free Statistical Tests (En slewood Cliffs. N.J.: Prentice-Hall, 1968)}. We use the chi-square test here because ‘Vis more familiar to students and because it is simpler.138 Caen eis infinity). A cumulative probabity normal distribution table) 15 then eng The probability benween these cutofls is the probatyiy Which 1 calculated in column D. For example, cell D6 containg ot (0 verifies that the probabilities of the ranges sur 6 D times the sample size of 10 give the pected Y UP to upper cutoff for the topmost rane ered as these Z scores (from a cumulative 1 data in column ¢ the range CS> The total in cell DI 0. The probabilities in column frequencies in column E These frequencies in column E are those that would be expected if the a mean of zero and a standard deviation of 158.1} he sample appear in column F. The larger the differences between the expected frequencies and the actual frequencies the less likely that the distribution is normal. The chi-square statistic measures, the differences between the expected and actual frequencies The overall chi 1 of the contributions to that statistic based on the and actual frequencies for each range. The ustic for each range is calculated as: distribution ts normal with The actual frequency counts in t square statistic 1s the sum differences between the expected contribution to the chi-square st (jactual frequency — expected frequency| — 0.5 expected frequency (4-15) The particular spreadsheet used here has an absolute value function denoted by @ABS. Therefore. cell G5 contains “((@ ABS(FS-ES) ~ 0.5)°)/ES* and parallel entries are in cells G5 through G8. The contributions to the chi- square statistic are summed cell G10; this total chi-squared statistic mea- sures the difference between the actual and the expected frequencies, and the distribution of this statistic is known. The number of degrees of freedom js the number of ranges minus three, so in this case the number of degrees of freedom is 1. From a table of critical chi-square values, at the 90 percent confidence level with one degree of freedom, a chi-square statistic of greater than 2.71 is required to accept the hypothesis that the two frequency distri butions are not the same. Since the calculated chi-square statistic is 0 1786, the hypothesis of nonnormality is not supported at the 90 percent confidence level. . eas test is for autocorrelation Autocorrelation has to do with ail ae of posi ive or negative trends. Does knowing one value tell us eae nee Naas Ifit does, there is autocorrelation. Ifa higher- Gane mike Weal ee ne is associa led with a higher-than-average the cash flows and positive ere Is a positive correlation coefticiemt amont See enn Ifa higher-than-average value outcome, there is a et ee eee te negative autocorrelation. Any sipnifies cvelticicnt among the cash flows a’ tive Je vislation otic eee ees. Positive of nevi Wer-Orr model.oaels for he Management of Cash and Temporary Investments 139 Ina testing for autocorrelation, one possible approach is based 1 significance of the cortelation eoetficient between one ny enmre ow and the next day's cash flow. To perform such a test. the ae set ticient is first calculated, then tested to see if itis significantly Uff re from zero: A significantly nonzero correlation coefficient. either positive or tive. isevidence of autocorrelation. The formula for the Pearson product sg aistte nega amnent correlation coefficient between these two cash flows is > (NCE, ~ E(NCE)) (NCE, ,~ EINCF,.)) p= Me = = 4-16 Syn 55 yen) ee where ris the correlation coefficient, Ni is the net cash flow on day f, E(NCF,) is the expected net cash flow on day ¢, NCF,_, is the net cash flow on day -1, and E(NCF,_,) is the expected net cash flow on day t~ 1. Also. Sper and SSyerr-1 are the sums of squared deviations for NCF, and NCF,_, respectively. The sum of squared deviations for NCF, is: ~ SSyen = >, (NCF,- E(NCF,))* (4-17) are and SSycer-1 i8 2 corresponding formula. In this test, we want to constrain the expected net cash flows (E(NCF,) and E(NCF,_,)) to zero \if they are not actually zero) since a zero mean is required by the Miller-Orr model. In this special case, equation (4-16) reduces to: D (NCE) (NCE) ae © (SSyerS$Sserr-1 (4-18) and equation (4-17) reduces to: SSycin =D (NCEP (4-19) A spreadsheet to perform this test for the data from Table 4-1 is presented in Table 4-3. The original data are in columns A and B. Column C contains the prior day's net cash flow (for example, cell C6 contains “BS"). Because no prior data is available for day 1, that data point is lost, and analysis proceeds. using data from days 2 through 10. We use these data to calculate the nu- Merator and denominator of equation (4-18). The sums. of squared deviations {rom zero required for the denominator are calculated in columns D and E; i | Table 4.3. Calcutation for First Order Correlation ¢ ‘oe Mic tent for Example Net Cash lows , dD " ' ‘i ' vo op ou cy! . : 1 . : Prior Day's Prior Day's Pradictcr 3 Day’ Day's. Squared Squared Devianons | | a NCI Deviation Deviation from Zero | ; ep! ia from Zero from Zero | be ; | 7 ; 0 100 10000 10000, 10000) | 7 1 200 100 40000 10000 2000 | s 4 at) 20 0 40000 0 ° 5 100 0 10000 0 7 10 6 30 100 0000 19000 30000 i : — wo 0, 90000 | P 8 200 0 40000 0 o | B 9 200 20 16000 10000 es MW 10 100 200 10000 40000, 20000 i: 240000 16 Sums of Squared Deviations 240000 2 17 Sum of Product of Deviations ; 000 18 Correlation Coefficient -0.333 In column D, each of the day's cash flows from column B is squared, and the sum of these is presented in cell D16; column pertorms @ parallel calculation for the por day's cash flows. For this particular example. the suins of square deviations from zero for the day's cash flows and the prior day's cash flows are both 240,000 The numerator of equation (4-18) 1s calculated in column Po The nu. merator is the sum of the products of the day's cash flow and the prior day's cash flow. so each row in column F cositains the day's cash flow (from columa B) times the prior day’s cash flow (from column C). Phas. cell Fo contains “BoeC6". Cell FLT gives the sum of cells Fo through FLA, which is the nu- merator of equation (4-18). Cell FI8 contains the formula for the correlation coefficient, which in this spreadsheet is “FI7/((D16 E16) 1/2 The calculated value for the correlation cocfticient is - 0.333. To test whether this is significantly different from zero, we use a Studeavs t-test The formula for converting a correlation coefficient into a t-score is: SN 2Y/(L=ryyi? (4-20) where fis the ¢ statistic and Nis the number of data points used (nine in ths example). ‘This statistic has N~2 degrees of freedom. The ¢ statistic for the example is then:gy the Management of Cas - ‘nt of Cash and Temporary Investments mi CAN Q/L pyper OM vA ile ; dygayy 0.935 (424 ine : if the correlation coef im avo tailed LeU 18 required. With seven Fee aits OF negative direct ‘ihe Students Caistribution is contained betweet ee | s95. Since the calculated statistic is with a thi pean eels ugnifte ant autocorrelation is not accepted at the on; ee since the data are neither significantly nonnormal nor sige nie a plate. the firm might consider applying the Miller Orr sredel we nthe management strategy for cash and temporary investments, et The Miller-Orr model is intended to apply when the firm hi follow a random walk. However, age Gu i i" fit considerable certainty (such as dabureerene) cage ron be quite uncertain. In the case where the firm has ‘some ie oh pieder free) knowledge of future cash flows, the Miller-Orr vaciiel a ny up nonoptimal strategies. For example, if the upper control limit Hate ler Orr model is pierced, the model suggests that the firm invest. But if tied i knows that a major cash outflow is imminent, this investment may not bs the best strategy. It may be better for the firm to ignore the signaled ih keep the funds in cash to cover the outflow, and save the facia ce on the investment and disinvestment. The Stone look-ahead model described in the next section allows the firm to modify investment and disinvestment decisions based on expected future cash flows. : ine assumptions of the Miller-Ore model are viol «significantly different from zero ina sens THE STONE MODEL Like the Miller-Ore model, the Stone model takes a control-timits ap- proach; when cash balances fall outside the contro! limits, the firm is signaled to do something.» But in the Stone model, the signal does not automatically result in an investment or disinvestment: the recommended action depends on management's estimates of future cash flows. That is, the model signals an evaluation by management rather than an action. To do this, the Stone model uses two sets of control limits (see Figure 4-6); the inner control limits (UCL, and LCL,) and the outer control limits (UCL and LCL.) Under the Stone model, strategy procecds as follows. The firm performs no evaluation until its cash balance falls outside the outer control limits. When this occurs, the firm looks ahead by adding the expected cash flows tor the This model is presented in Stone, “The Use of Forecasts.”— 142 Chapter 4 ucta ucu --—- Cll Lolz i $ i 20 | ——— » Roturn Pout i - Day Figure 4-6. Control Limits for the Stone Model. next few days to the current balance. If the sum of the current balance and thesevexpected future cash flows (which is the expected cash balance a few he inner control limits, a transaction is made; other- days hence) falls outside t ; wise, the transaction is foregone The transactions are the same as those in the Miller-Orr model. Investments are made sufficient to bring the cash bal- ance back to the return point if the upper control limit is exceeded; corre- sponding disinvestments are mage if the lower control limit is exceeded, Optima! procedures for setting the return point, the two sets of control limits, and the number of days a firm looks ahead are not specified; the outer control limits could be set by the Miller-Orr model or could be based on the cash manager's feeling for the best limits. To see how the Stone model would function in practice, let us consider the first cxample used in the discussion of the Miller-Orr model. In this discussion, the beginning balance was $150,000, the upper control limit was $325,000, the return point was $175,000, the lower control limit was $100,000. The cash flows for the first five days were: Day Net Cash Flow 1 ~ $25,000 2 ~ $75,000 3 $100,000 4 ~ $25,000 5 $125,000 Let us also assume that the inner co: sun ntrol limits are set $20,000 inside the ee limits (at $305,000 and $120,000), and that the firm looks ahead at the next two days’ cash flows. At the end of day 1, the cash balance isyy the Management of Cash a ses and Temporary Investments 7 43 1 UCL2 = 325 | 7 eee UCU Oe === Rotuin Point = 175 = LOLI = 120 —"LCL2 = 100 Day Figure 4-7. Cash Balances for the Stone Example. 125,000, but since the outer control limits have not been breached, no evaluation is made. At the end of day 2, however, the cash balance has peen reduced to $50,000. At this point, the firm totals the next two days’ cash flows. Let us assume that this forecast is correct; the total obtained is $75,000 (100,000 ~ 25,000) as the expected future cash flow. Adding this to the current balance of $50,000 gives an expected balance of $125,000. Since this expected cash balance is within the inner control limits, no trans- action is made. The pattern of cash balances that would result is illustrated in Figure 4-7; there are no investments or disinvestments over the five-day period of the example (recall the Miller-Orr model required one investment and one disinvestment). When the firm has some knowledge of future daily cash flows, the Stone model offers an advantage over the Miller-Orr model in reducing the number of investment and disinvestment transactions, though investment income may also be reduced. Also, the Stone model is very flexible in that it does not assume a flat yield curve, and in that the parameters of the model may be changed over time to accommodate the firm's needs. For example, the control limits may be tightened during periods when cash control is critical, or the look-ahead period may be lerfgthened when the firm has better information about future cash flows. Set against these advantages is a substantial disad- vantage: the model does not specify the optimal levels of the parameters (the control limits, the return point, and the look-ahead period). Stone states that these parameters should be set by the manager by trying various strategies on past data and observing the results; this is a sensitivity analysis approach. ‘There is no guarantee that this process will lead to optimal (or even near- Optimal) strategies. Indeed, though it is flexible and has substantial intuitive appeal, the Stone method might be more properly regarded as an approach ‘o the daily management of cash and temporary investments rather than an “Plimization model for this managementChapter 4 ie Table 4-4. Time Pattern of Cash How Assumed in Four Models of Short Term Investment Model Asswmprions Regarding Cath How Partern 1 Albeash flows are Cash inflows are pe Baw stain odic and instantaneous 4 Cash outflows occur at a constant rate Cash outflows are periodic and instantaneous 3. Cash inflows occur at a constant rate Firm hay minimum required cash balance Cash flows are normally distributed The expected cash flow is zero There is no autocorrelation in cash flows The standard deviation of cash flows does not change over time. Miller-Orr Ween Stone 1. Firm has minimum required cash balance Firm has some knowledge of future cash flows, although this knowledge contains an error component | Beranck L. All-cash flows ate certain | | OPTIMIZATION MODELS FOR SHORT-TERM INVESTMENTS IN PERSPECTIVE In the past sections, we have discussed four models that generate strat- caies for the short-term investment of funds. All of these models are oriented toward small- and medium-sized firms where the amounts of cash available for investment are sufficiently small that transaction costs are an important consideration in formulating strategy. All of these models take a similar approach: they first hypothesize a time-pattern of cash flows, then develop a strategy appropriate for that ume pattern. The Miller-Orr and Stone models explicitly address the risk in the net cash flows, while the Baumol and Beranek models assume certainty. In the latter cases, risk must be addressed outside the methods by using the hedging strategies for cash flow uncertainty outlined in Chapter 3. : in deciding whether to use these models, the firm must examine the yield on its investments versus the transactions costs of making such invest- "Numerous models besides those discussed or referenced in this chapter have also been developed to address other cash flow patterns. Many of these models are discussed in G. Gregory, “Cash Flow Models A Review.” Omcea. Vol. 4. No. 6 (1970). pp. 613-56aaels for the Management of Cash and Temporary Investments 145 eats. HE transdetton costs ate large re fa has foregone Mvestments because of suc hiransaction costs Froutel bE considered. Fo choose among thes maton the HME pattern of the firm's cash inthe models. Table 4-4 relates the four models to their aeumed tare pat terns. This match should be based On the specifies of the firm’s business policies that affect cash flows (how often payments are made to suppliers the firm's terms of sale, and so forth) and on empirical investigations of the sume patterns of cash flow. The latter Investigation might include time plots ‘of net cash flow and statistical comparisons of net cash flows with known probability distributions. lative to investment income and the these models models, the first step flows to the time Patterns assumed THE MANAGEMENT OF CASH AND TEMPORARY INVESTMENTS iN PRACTICE The first purpose of this chapter was to review several optimization models for the short-term investment decision. The second Purpose is to present survey evidence of the practices actually used by the cash managers of firms. Unlike some other areas of working capital management, there is a good deal of available survey evidence describing current practice im the management of cash and marketable securities. Such evidence is helplul be- cause it gives the student useful knowledge in two areas First, it tells the student which material presented in the past three chapters 1s likely to be used in the firms that may employ them. Second, it tells which practice are candidates for impro analysis methods. For ease of lise areas of curvent ment by the adoption of new and better von. the survey information will De pre- sented according te the major topics covered in the past three chapters, We will refer to the survey articles in this area by the initials of their authors, For students concerned about the samples used and the dates of the surveys. or who wish to read the original articles, details of the surveys in Table 4-5 are presented Management of Cash Inflows In general, firms perceive that the accel- eration of the receipt of cash is more important than the control of disburse ments (GMW. p 34) ‘To achieve this acceleration, the use of lockboxes is Widespread (GMW. pp. 35-36; SS. pp. $4, 65), Virtually all large firms use luckbox systems as do a large percentage of smaller firms (GMW, p. 30) This somewhat lower use by snialler firms is a reflection of the costs versus the gains from lockbox systems; for such systems to be economical, the gain for the acceleration of receipts must be sutficient to « the costs of the System, and large firmus have lugher average receipts. To ban ected funds lovether for use, over one-half of all large firms use concentration bank (GMW, P. 36), with wire transfers and depository transfer checka9 RE 2iny uodsoy Areprqriyord, pur o7ts uo pasrg BONDAIES WIM “000'T s.pun110.4 JO 999 (suzy €2¢) TROL ue ONTU gg 49A0 Jo sanunaas 91qriayseu wim sug papen aierodic) JO lusuissassy uy. .seonotag quswo3eUry sanunsag aiqrioxzeyw JO iusuissossy UV.. J SiaTeuRW [eouruLy ainiodsod £q suondo pur soning ny was] JO 9s OL. anny, apm IPs 's pur yg 4 ss 131NED “7 5 pur faino5 -g suodeddry -y QO OU spatdarquia “6 pur uaIW oH “USNRUM “S “ewe a MINN PUAN TT pur ‘sasow “Fy suru “1 uImpoon Ww pur urwnip 7 59 soysenrg pur y01g “S ssoyiny og vonpis gay, PEST) AUSUNEZAUI U2 |-YOYS PUR YSe> JO JUsW2BEUEW aY7 LO Say AaAINS ay? BuIpIeBay S124 “G-p 21921odels for the Management of Cash and Temporary Investments 147 arimary Means Of moving funds from one bank to another (GMW p. 33:55 ae Temporary Investments Aimost all large firms (96 percent) invest sur- plus cash in Money market instruments (KKMW, p. 71). To select the in- stuments for investment. the criteria tance) are default risk, liquidity, yield, tin p 74 GG. p. 165; SS. p. 66). used (in descending order of impor- me to maturity, and price risk (KKMW, Firms typically use three of four types of single ‘ype of security (RGG, p. 6). These investment held to maturity (KKMW, p. 76; GG, p. 164). If differences in the time to maturity of the different instruments are ignored, the most Popular invest- ments (in descending frequency of use) are: commercial Paper, certificates of deposit, repurchase agreements, treasury securities, and banker's accept- ances (KKMW, p. 73, provides a summary of KKMW, GG, SS. and GMW). However, the most popular type of investment varies with the length of time that the funds are available for investment. Repurchase agreements and com, merciat paper are the most popular investments for maturities under 30 days, ubile certificates of deposit and commercial paper are most popular invest. ments for maturities over 30 days (KKMW, p. 73). Eurodollar deposits have become more popular over time (KKMW, P. 72). This trend is based on the higher interest rates available on such deposits (RGG, P. 7), a phenomenon which will be discussed in Chapter 13 of this text. Management of Cash Outflows ‘The primary tools for the management of cash outflows are zero-balance accounts and centrally controlled disbursing. Central control of disbursements is the major tool for about 70 percent of large firms (SS, p. 65; GMW, p. 37). Zero-balance accounts are used by the vast majority of larger firms, although they are used less frequently by smaller * firms (GMW, p. 35). There appears to be substantial disagreement among firms as to whether the further delay of payments to suppliers (via maximi- zation of mail float, for example) is useful. Some firms report the use of this” technique (GMW, p. 37), while others think it is a bad idea (SS, pp. 54, 65). Cash Forecasting Almost all large firms prepare cash forecasts (GMW, p. 35; GRR. p. 11). Smaller firms are less likely to prepare such forecasts (GMW, p. 35). These cash forecasts are the primary method used to deter- mine the amount and duration of temporary investments in marketable se- Curities (KKMW, p. 76). In hedging the risk that cash flows may be less than forecast, many firms use more than one technique. A substantial number of firms keep a stock of short-term investments for precautionary reasons (GMW, p. 37; RGG, pp. 3.12). Many firms also borrow to address unanticipated cash necds, either148 Chapter 4 directly from banks or through the commercial paper market (GRR 12, 26) ave Futures and Options for Hedging Whe number of firms using futures and options on financial instruments to hedge the risk of future borrowing, and lendings or to protect against interest rate risk in temporary investmenn is not yet very large. About 20 percent of large firms use these contracts, and they use them almost exclusively for hedging rather than speculation (BG pp. 75-6). Bigger firms are much more likely to use the contracts than are smaller firms (BG, p. 75). Treasury bill futures and Eurodollar futures are the most frequently used contracts, with the most important uses being the hedging of expected future borrowings and lendings (BG, p. 76). The reason for the relatively low use of these hedging vehicles appears to be top man agements’ resistance to these contracts, caused by a lack of knowledge about their characteristics, advantages, and costs (BG, pp. 77-8). Models for Temporary Investments While, in general, quanti(ative and statistical models are in wide use in working capital management (GMW, p. 36), the models discussed in this chapter (which balance the transactions costs of investment against interest revenues) have not found wide acceptance They are in use by less than"10 percent of large firms (SS, p. 68; GRR, p. 26). Further, smaller firms do not use them at all (SS, p. 68). This is perhaps due action between the need for models of these sorts and the financial sophistication of firms. These models are primarily oriented toward small- and medium-sized firms, where the amounts of investment are such that transaction costs are an important offset to interest income. Yet smaller firms tend to be less financially sophisticated, as much research on the adoption of other advanced financial techniques has shown. '* to an inter: SUMMARY This chapter addresses two topics. The majority of the chapter is con- cerned with cost-balancing models for decisions regarding the temporary 1n- vestment of cash into interest-bearing investments. These models balance the interest revenues from these investments against the fixed cost of making investments and disinvestments. Each of the four models assumes a different time pattern of cash flow, then derives a strategy based on this time pattern. In choosing among these models, the firm must first compare its time pattern of cash flows against those assumed by the various models. The Baumol and "See, for example, J. W. Petty and O. D. Bowlin, “The Financial Manager re Quantitative Decision Models," Financial Management (Winter 1976), pp. 2-tor tre Management 0! Cash and Temporary Investments models 149 yeranek Cee eee RAE and thus require a hedging strategy outside ie content of the model, while the Miller-Orr and Stone models e«plicitly at for the uncertainty of cash flows within their formulation. The second part of the chapter reviewed several surveys in the current practice of the management of cash and marketable securities. In general the management techniques discussed in the text concerning the management of cash inflows, temporary Investment of surplus funds, cash budgeting, and edging cash uncertainties are in use by a substantial portion of larger firms por the management of cash outflows, some of the techniques we described ae frequently used, but some firms also use techniques (such as increasing mail float on outgoing checks) that other firms believe are inappropriate. and which we have not addressed in depth. We have also devoted considerable gpace in this text to two techniques not in wide use: hedging with interest rate futures and cost-balancing models. The most probable reason for the relatively infrequent use of these techniques is management's lack of famil- jarity with them. These are areas where employees might make significant contributions to the current practices of their firms, if the circumstances are appropriate for the use of these methodologies. gccoll Problems 4-1. A firm has periodic cash inflows and steady cash outflows and wants to use the Baumol model to formulate a strategy for the temporary investment of some of its cash. The firm receives an inflow of cash every 15 days (use a 360-day year). The yield on invested cash is 12 percent per year. It costs $500 to invest or disinvest, and the portion of the next cash inflow that will be retained to pay bills over the following 15 days is $3.2 million. Calculate: a. The optimal number of transactions. b. The amount of the initial investment. c. The amount of she periodic withdrawals. d. The net profit from this strategy. 4-2. A firm has steady inflows and periodic outflows and wants to use the Beranek model to manage its cash. Cash outflows occur once per month; the amount of the next outflow is $2.16 million. It costs $200 to make an investment or a disinvestment. The yearly interest rate is 8 percent. Calculate: a. The optimal number of transactions. b. The amount of the periodic investments. ¢. The amount of the final withdrawal d. The net profit from this strategy.Ch ot 4.4. A firmis trying to decide whether its cash flows fit the ASSUM pri, of the Miller Orr model. A sample of 15 cash flows has yer : tained Day Net Cash Flow Day — Net Cash Flow 1 $0 9 $500 2 $100 Ww ~ S00) 3 $200 I $30) 4 $300 12 ~ $200 5 $100 13 5100 6 30 4 -$100 7 $200 Is $200 8 $400 a. Calculate the standard deviation of these cash flows assuming a zero mean. 2 b. Using a chi-square test, assess whether the data are normally distributed under that assumption of a,zero mean. Utilize five ranges: less than —250, —250 to —75, —75 to +75, +75 to +250, and greater-than +250. . Using a Student's t-test, assess whether the data are serially correlated. 4-4. A firm has confirmed that its daily cash flows are in accord with the assumptions of the Miller-Orr model. Based on historic data, it has been determined that the standard deviation of daily cash flows is $400,000 with a mean of zero. Interest rates on short-term investments are 6 percent per year (use a 360-dz year). Each investment or disinvestment costs the firm $100 in Paperwork costs, etc. The firm's bank requires a minimum cash balance of $500.,(KN): this is the firm's lower control limit. a. Calculate the return point and the upper control limit. b. Assume that the firm's initial cash balance is $1,000,000 and that it experiences the following cash flows over the first seven days: Day Net Cush Flow — $300,000 ~ $400,000 $500,000, — $200,000 $900,000 $200,000 $700,000 MauUeupeal for the Management of Cash and Temporary hnvestments oe 151 Using the control himits and re indicate the transactions that w flows. Give the amounts of investments turn points calculated in part a ould occur for this series of cash ANY puchases or sales of short term 4-5. A firm wishes to use the Stone look-ahead model with 4 one-day look-ahead. It has determined that the outside upper control limit is $1,600,000, the inside upper control limit is $1,300,000, the return point is $1,000,000, the inside lower control limit is $750,000, and the outside lower control limit is $500,000. Assuming that the ah ing cash balance is $1,000,000 and Usingathe seven days of cash flows {rom Problem 4, find the transactions that would occur during the first six days. Selected Readings paumol, William, “The Transactions Demand for Cash: An loventory Theoretic Approach,” Quarterly Journal of Economics (November 1952). pp. 54556 glock, S., and T. Gallagher, “The Use of Interest Rate Futures and Options by Corporate Financial Managers,” Financial Management (Autumn 1986), pp 3-28. Beranek. William, Analysis for Fmancial Decisions (Hor Irwin, 1963), Chapter 11 Daellenbach, Hans, “Are Cash Management Optimization Models Worthwhile? Journal of Financial and Quantitative Analysis (September 1974), pp. 02-26 Emery, Gary, “Some Empirical Evidence on the Properties of Daily Cash Flow.” Financial Management (Spring 1981). pp. 21-28 ewood, TL: Richard D Eppen, Gary, and Eugene Fama, “Cash Balance and Simple Dynamic Portfolio Prob- Jems with Proportional Costs,” International Economic Review (June 1909), Gregory, G., “Cash Flow Models; A Review,” Omega, Vol. 4, No. © (1976). pp. 643-56. Kamath, R., S. Khaksari, H. Meier, and J. Winklepleck, “Management of Excess Cash: Practices and Developments,” Financial Management (Autumn 1985). pp. 70-77 Miller, M. H., and D. Orr. “A Model of the Demand for Money by Firms,” Quarterly Journal of Economics (August 1966). pp. 413-45. Rappaport, A., P. Goulet, and L, Goulet, “Marketable Securities Portfolio Manage ment: A Survey of Theory and Practice,” available from the authory at the University of Northern Lowa. Stone, Bernell, “The Use of Forecasts and Smoothing in Control Limit Models for Cash Management,” Financial Management (Spring 1972). pp. 72-84