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Chapter 10

Working capital management – Cash and

funding strategies

Outcome

By the end of this session you should be able to:

 explain the main reasons for a business to hold cash

 define and explain the use of cash budgets and cash flow forecasts

 prepare a cash flow forecast to determine future cash flows and cash balances

 explain the points addressed by the Baumol cash management model

 explain the logic of the Miller-Orr cash management model

 calculate the optimum cash management strategy using the Baumol and Miller-
Orr cash management models

 explain the ways in which a firm can invest cash short-term and long-term

 calculate the level of working capital investment in current assets from supplied
data

 explain the main strategies available for the funding of working capital

 explain the distinction between permanent and fluctuating current assets

 explain the relative costs and risks of short-term and long-term finance

 explain the logic behind matching short-term and long-term assets and funding

 explain the relative costs and benefits of aggressive, conservative and
matching funding policies

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