The document discusses two models for cash budgeting and cash management: the Miller-Orr Model and the Orgler Model. The Miller-Orr Model is developed for businesses with uncertain cash inflows and outflows. It allows for setting lower and upper cash balance limits and determining an optimal target cash balance. The model symbolically represents the total cash management costs as a function of conversion costs and expected cash balances. The Orgler Model formulates cash management as a multiple linear programming problem. It uses four decision variables - payment schedules, short-term financing, purchase/sale of securities, and cash balances. The objective is to minimize net costs subject to constraints. A cash budget is also discussed as

1. MODEL:-Miller-Orr Model &
Orgler Model and Cash Budget
Submitted by:-Shikha
M.com( Hons )-Sem1

2. Miller-Orr Model
INTRODUCTION:-
M.H Miller and Daniel Orr(A Model of the
Demand for Money)expanded on the Baumol
model and developed for firms with uncertain
inflows and cash outflows.
The Miller and Orr model overcomes the
shortcomings of Baumol model.

3. Definition:-
• The Miller-Orr Model is developed for
businesses with uncertain cash inflows and
outflows . This approach allows lower and
upper limits of cash balances to be set and
determine the return point (target cash
balance).

4. Assumptions…
• Each day business have both different cash
payments and cash receipts.
• Daily cash balance is normally distributed i.e. It
occurs randomly.
• Possibility to invest idle cash in marketable
securities.
• There is a transaction fee when marketable
securities are bought or sold.
• A business maintains the minimum acceptable
cash balance which is called the lower limit.

5. Objective….
To determine the optimum cash
balance level which minimizes the
cost of cash management

6. Symbolically represented as:-
C= bE(N)+ iE(M)
t
where,
• C=Total cash management
• b= fixed cost per conversion
• E(N)=expected no.of conversions
• E(M)=expected average daily cash balance
• i=lost opportunity cost
• t=no.of days in a period

7. • Basically MO Model assumes the cash
balances randomly fluctuate between upper
bound(h) and lower bound(O)
When cash balances
hit the upper bound
(means firm has too
much cash
When cash hit zero
They should buy
marketable
securities to bring
the cash back to
optimal bound(z)
They should sell
the securities to
return to the
optimum bound

8. According to MO Model ,the optimal cash
balance (z)can be expressed symbolically as:-
where,
• r2= variance of daily changes in cash balances
• MO Model also specifies optimum upper
boundary(h) as three times the optimal cash
balance level such that
Z= 3br2
4i
h= 3z

9. Example:-
• Q=The management of Popular Traders anticipates Rs. 15
Lakh in cash outlay. The recent experience has been that it
costs Rs. 30 to convert marketable securities into cash. Rate
of return on marketable securities = 8%, the variance of daily
net cashflows =Rs. 27000.Show the cash balances as per
Miller-Orr Model.
• Sol= Given
b=30
r2= 27000
Return point = (3)(30)(27000)
(4)(0.000222)*
=Rs.1399
*daily portfolio return=(8%/360days)

10.  upper limit=3z
=(3)(1399)
= Rs. 4197
Cash would we allowed to vary between Rs.0(zero)
and Rs. 4197
When upper limit is reached to Rs. 2798(4197-1399)
(Convert from cash to marketable securities)
When the cash balance falls to zero Rs.1399(1399-0)
(Converted from Marketable securities into cash)

11. Orgler’s Model
• Acc. to this model an optimal cash
management strategy can be determined
through a multiple linear programming model.
• Model comprises three sections:-
1) Selection of appropriate planning horizon
2) Selection of appropriate decision variables
3) Formulation of cash management strategy

12. It has four sets of decision variable
which influence cash management:-
Payment Schedule
Short –term
financing
Purchase and sale
of marketable
securities
Cash balance
itself

13. Objective
To minimize the net cost from the cash
budget over the planning horizon
subject to the constraints involving
decision variables.

14. • Assumption:-All revenues generated are
immediately re-invested.
Objective function recognizes each operation
that generates cash inflows or cash outflows
as adding or subtracting profit opportunities
for the firm from its cash management
operations.

15. In the objective function decision variables which cause
inflows such as payment on receivables , have positive
coefficient.
While those which generate cash outflows such as interest
on short term borrowings have negative co-efficient.
For Example:-
Purchase of
Marketable securities
that produce revenue
Conversion cost incurred
on sale of securities
Have positive
co-efficient
Have negative
co-efficient

16. Constraints of the Model
Institutional
Constraints:
• Those which are imposed by
external factors.
• Such as bank required
compensating balance,
Policy Constraints:-
• Those which are imposed on
cash management by the
firm itself.
• Such as finance manager
prohibited from selling the
securities before the date of
maturity.

17. Cash Budget:Management Tool
CASH BUDGET:- It is a statement of inflows and
outflows of cash that is used to estimate its short
term requirements.
Purposes of cash budget are:-
• To coordinate the timings of cash need
• It pinpoints the period(s) when there is likely to be excess
cash
• It enables a firm to have sufficient cash to take
advantage of cash discount
• Helps to arrange needed funds on the most favourable
terms and prevent accumulation of funds

18. Elements/Preparation of Cash Budget
The preparation of cash budget involves various steps
which can be described as elements of cash
budgeting system:-
First element:- Selection of the period of time to be
covered by the budget referred to as Planning
Horizon.
Planning Horizon means the time span and the sub-
periods within which the cash flows are to be
projected.

19. Second Element:-Selection of the factors that
have bearing on the cash flows
OPERATING CASH
FLOWS
FINANCIAL CASH
FLOWS
Cashflows generated by
the operations of the
firm
Cashflows generated by
the financial activities of
the firm

27. References:-
• Financial Management ,M.Y Khan and Parmod Kumar.
• Research paper:-https://twin.sci-
hub.se/5968/bed552f0a1bd933ab71d4659bcbf2e08/10.2307
@2629925.pdf

28. THANK YOU…