Determining optimum cash balance, Managerial Accounting

One of the main deities of the financial manager is to keep a sound liquidity position for the firm hence the dues are settled as and while they mature. Separately from this the finance manager has to make sure that enough cash is obtainable for the smooth running of operating activities and also for paying of dividends, taxes and interest. Under a nut shell there must be availability of cash to convene the firm's obligation and while they turn into due. The real dilemma that the finance manager faces is to chose on the quantum of cash balance to be not kept in such a manner that at any specified point of time there is neither cash deficit nor cash surplus. Cash is a non-earning asset; thus, cash must be kept at the minimum level. The cost of holding cash is the loss of interest or return had which cash been invested beneficially. The surplus cash cost is the cost of interest or opportunities foregone. The cost of shortage or deficit of cash is measured through the cost of raising funds to meet the deficit or in extreme cases the cost of restructuring, bankruptcy and loss of goodwill.

Cash shortage can results in sub-optimal investment and sub-optimal financing decisions.

The firm must keep optimum just sufficient neither more nor too little cash balance. There are several models used to compute the optimum cash balance such a firm ought to keep. However the most broadly termed as model is Baumol's model. This is chiefly used while cash flows are predictable.

Posted Date: 4/9/2013 3:35:49 AM | Location : United States







Related Discussions:- Determining optimum cash balance, Assignment Help, Ask Question on Determining optimum cash balance, Get Answer, Expert's Help, Determining optimum cash balance Discussions

Write discussion on Determining optimum cash balance
Your posts are moderated
Related Questions
Gather data concerning the relationship among the dependent and independent variables Collecting data is generally the most hard and time-consuming element of CER development.

Explain the categories of The activity cost drivers The activity cost drivers can broadly be classified into following three categories: 1) Transaction drivers: for exampl

Strengths and weakness of net book value and pay back method

Basic Assumption of Transportation Model The basic assumption of the model is that the transportation cost on a given route is directly proportional to the number of units tran

Inappropriate standards (or targets): This is a problem arising from deficiencies in planning. If not enough time and resources are devoted to setting accurate standards in th

Question: A friend of yours is revising for his examination in management accounting and needs some help from you. He asks you the following questions. Write brief notes on eac

THE GAMES ECONOMISTS PLAY It sounds like a sports fan's dream.  In Stockholm on October 11th, three men share a $1m prize for their skill at analyzing games. They are not telev

Explains how activity –based techniques can be used to improve performance

solutions for (POS) slow printing of sales tickets and unpredictable action of cash drawers. when credit approvals delayed the checkout process or when the computer was down, thus

CONTIGENCY THEORY Some researchers have argued that the context in which budgetary control is used is as important as the style in which it is implemented and used. This is ter