The Miller and Orr model of cash management is one of the various cash management models in operation. It is an important cash management model as well. It helps the present day companies to manage their cash while taking into consideration the fluctuations in daily cash flow.
Description of the Miller and Orr Model of Cash Management
As per the Miller and Orr model of cash management the companies let their cash balance move within two limits – the upper limit and the lower limit. The companies buy or sell the marketable securities only if the cash balance is equal to any one of these.
When the cash balances of a company touches the upper limit it purchases a certain number of salable securities that helps them to come back to the desired level.
If the cash balance of the company reaches the lower level then the company trades its salable securities and gathers enough cash to fix the problem.
It is normally assumed in such cases that the average value of the distribution of net cash flows is zero. It is also understood that the distribution of net cash flows has a standard deviation. The Miller and Orr model of cash management also assumes that distribution of cash flows is normal.
Application of Miller and Orr Model of Cash Management
The Miller and Orr model of cash management is widely used by most business entities. However, in order for it applied properly the financial managers need to make sure that the following procedures are followed:
- Finding out the approximate prices at which the salable securities could be sold or bought.
- Deciding the minimum possible levels of desired cash balance.
- Checking the rate of interest.
- Calculating the SD (Standard Deviation) of regular cash flows.
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