The Baumol model is a model for changing the balance of funds on a current account, in which the company invests all incoming funds from the sale of goods and services in securities, then, when the stock of funds is depleted, the company sells part of valuable papers and replenishes the cash balance to its original value.
According to Baumol's model, it is assumed that the enterprise begins to operate with the maximum and appropriate level of funds for it, and then is constantly spent over a certain period of time. The company invests all incoming funds from the sale of goods and services in short-term securities.
where Q is the optimal cash balance;
F - projected need for funds in the period (year,
quarter, month);
с - one-time expenses for converting cash into valuables
r - acceptable and possible interest income for the enterprise
The average cash reserve is Q/2, and the total number of transactions to convert securities into cash (K) is equal to:
Total costs (CT) of implementing such a management policy in cash will be:
The first term in this formula represents direct expenses, the second is the lost profit from keeping funds in a current account instead of investing them in securities.
2. Describe the indirect method of calculating cash flows
Indirect method is based on the identification and accounting of transactions related to cash flows and the consistent adjustment of net profit, i.e. the initial element is profit.
The essence of the indirect method is to convert the amount of net profit into the amount of cash. At the same time, it is assumed that in the activities of each enterprise there are separate, often significant in size, types of expenses and income that reduce (increase) the profit of the enterprise without affecting the amount of its funds. In the process of analysis, the amount of the indicated expenses (income) is adjusted to the amount of net profit in such a way that expense items not associated with the outflow of funds and income items not accompanied by their inflow do not affect the amount of net profit.
The indirect method is based on the analysis of balance sheet and income statement items, and:
Allows you to show the relationship between different types activities of the enterprise;
Establishes a relationship between net profit and changes in the assets of the enterprise for the reporting period.
When analyzing the relationship between the obtained financial result and changes in funds, one should take into account the possibility of obtaining income reflected in the accounting of actual cash receipts.
The indirect method of analysis is implemented on adjustments to the net profit of the reporting period, as a result of which the latter becomes equal to net cash flow (increase in cash balance). Such adjustments are conventionally divided into three groups according to the nature of business transactions:
1. Adjustments associated with a discrepancy between the timing of the reflection of income and expenses in accounting with the inflow and outflow of funds for these operations.
2. Adjustments related to business transactions, which do not have a direct impact on the formation of profit, but cause cash flow.
3. Adjustments associated with transactions that have a direct impact on the calculation of profit, but do not cause cash flow.
To make calculations, you must use the data from the accounts turnover sheet accounting, as well as individual analytical records.
Procedure for adjusting amounts for accounting accounts accounts receivable consists in determining the increment in the balance for the analyzed period in accounts receivable. The amount of this increment will be adjusted financial results analyzed period. If the increment is positive, then the amount of profit must be reduced by this amount, and if negative, it must be increased.
Adjustments to profits in connection with the accrual of depreciation are made to the amount of accrued depreciation for the analyzed period (credit turnover on accounts 02, 05), while the amount of profit increases.
The mechanism for calculating the adjustment of net profit in accordance with the indirect method of cash flow analysis is presented in table. 1.
Table 1
Mechanism for calculating adjustments to net profit based on the indirect method of analysis cash flows
Index
Form number, line code
Net profit
Net cash flow
Adjustments to net profit due to changes in balance sheets of intangible assets
fixed assets
unfinished construction
long-term financial investments
deferred tax assets
VAT on purchased assets
accounts receivable (payments for which are expected more than 12 months after the reporting date)
accounts receivable (payments for which are expected less than 12 months after the reporting date)
short-term financial investments of reserve capital
Net income after adjustments (must be numerically equal to net cash flow)
1, p. 470 (less net profit of the reporting year)
The indirect method of cash flow analysis allows us to determine the influence of various factors of the financial and economic activities of an organization on net cash flow.
The indirect method helps to detect negative trends in a timely manner and promptly take adequate measures to prevent possible negative financial consequences.
To solve the problem of interconnection of two “net” resulting indicators: net profit and net cash flow, an indirect method of analysis is used.
The indirect method allows:
Monitor the correct completion of accounting forms financial statements No. 1, No. 2, No. 4 by connecting net cash flow and net profit;
Identify and quantify the reasons for deviations of financial performance indicators, calculated by different methods, from each other (net cash flow and net profit);
Identify those in the balance sheet asset items that could trigger an increase or decrease in funds;
Monitor the impact of changes in passive items on the cash balance;
Consider the depreciation factor as the cause of the gap between net income and net cash flow;
Explain to the manager the reasons why the organization’s profit is growing, and the amount of funds in the current account is decreasing.
When assessing the results of the analysis, you should keep in mind that a growing successful business is characterized by:
Tributaries - equity(profit of the reporting year and deposits of participants), loans and borrowings, as well as accounts payable;
Outflows - fixed assets, inventories and receivables, that is, inflows on the liability side of the balance sheet and outflows on the asset.
3. Define the following concepts: financial instruments, emission policy, elasticity
Financial instrument
- financial document(currency, security, monetary obligation, futures, options, etc.), the sale or transfer of which ensures the receipt of funds. This is, in fact, any contract, the result of which is the appearance of a certain item in the assets of one party to the contract and an item in the liabilities of the other party to the contract.
Emission policy– a set of long-term rules that determine the procedure for issuing and repurchasing the company’s own shares.
Elasticity(from the Greek elasticos - flexible) - a measure of change in one indicator in relation to the change in another, on which the first depends. Mathematically, it is a derivative of one indicator by another, a change in one indicator due to an increase in another indicator by one.
Bibliography:
1. Kovalev V.V. Financial management. Theory and practice - M.: Finance and Statistics, 2007.
2. Leontyev, V.E. Financial management [Text]: Textbook. manual for students studying in the specialties “Finance and Credit”, “Accounting”. accounting, analysis and audit", " World economy» / V.E. Leontyeva, V.V. Bocharov. – St. Petersburg: IVESEP, 2005.
4. Let’s determine the net return on equity (NER) of enterprises:
If the enterprise uses only CC, then
HRSS = (1-CH)*ER=2/3ER
If the enterprise uses CC and AP, then
HRSS = (1-CH)*ER+EGF=2/3ER+EGF
For enterprises:
HRSS 1 =2/3*0.21=0.14=14%
HRSS 2 =2/3*0.21+0.0053=0.1453=14.53%
HRSS 3 =2/3*0.21+0.016=0.156=15.6%
HRSS 4 =2/3*0.21+0.0258=0.1658=16.58%
HRSS 5 =2/3*0.21+0.0320=0.172=17.2%
5. Let us display graphically the dependence of return on equity on the capital structure in Figure 1.
We will plot the formation of the financial leverage effect in Figure 2.
For convenience, we will enter all the necessary data for constructing the graph in Table 4.
Table 4
Conclusion: The power of financial leverage increases with increasing share borrowed capital. Increasing the share of long-term borrowed money leads to an increase in return on equity, but at the same time there is an increase in the degree of financial risk.
Task No. 2
According to Table 1, determine the amount of long-term and short-term liabilities, own working capital for each strategy. Graphically display financing strategy options current assets.
Table 1 Strategies for financing working capital, thousand rubles.
1. In the theory of financial management, there are 4 strategies for financing current assets:
2. Determine financing strategies working capital for our company:
Table 3 Aggressive strategy
Table 4 Compromise strategy
Table 5 Conservative strategy
SOK =
0
Task No. 3
Based on the data in Table 1, construct three graphs of the profitability threshold that reflect an increase in profit by 50% due to changes:
Selling price;
Fixed costs;
Variable costs per unit.
Draw a conclusion about the influence of each factor on the value of the profitability threshold.
Table 1 Determination of the profitability threshold
Option
Product output, thousand units
price, rub.
Variable costs per unit, rub.
Fixed costs, thousand rubles.
15
118
420
165
17800
Solution:
1. Determining the profitability threshold when profits increase by 50%.
The profitability threshold is determined by the formulas:
Threshold revenue is calculated using the formula:
PR = I post /kVM,
(1)
The gross walrus coefficient is calculated using the formula:
kVM = VM/Vyr,
(2)
Gross walrus is calculated using the formula:
VM = Vyr – And per,
(3)
Where ETC– profitability threshold, thousand rubles;
And post– fixed costs, thousand rubles;
kVM– gross margin ratio;
VM– gross margin, thousand rubles;
Vyr– sales revenue, thousand rubles;
And per– variable costs, thousand rubles.
Vyr= 420*118= 49560 thousand rubles.
And per= 118*165 = 19470 thousand rubles
VM
kVM
= 165/420 = 0,39
And post= 17800 thousand rubles
3 total = 19470+17800 = 37270 thousand rubles
Profit = 49560-37270 = 12290 thousand rubles
PR RUR= 17800/0.39 = 45641.03 thousand rubles
PR unit
= 17800/(420-165) = 69,80
2. Let’s determine the profitability threshold when profits increase by 50% due to a change in the selling price.
Profit increases by 50%:
12290+50%=18435 thousand rubles
Vyr= 18435+17800+19470 = 55705 thousand rubles.
Price
= 55705/118 = 472
And per= 118*165 = 19470 thousand rubles
VM= 55705–19470 = 36235 thousand rubles
3. Let’s determine the profitability threshold when profits increase by 50% due to changes in fixed costs.
18435=420*118-165*118- And post N
And post N = 11655 thousand rubles
Taking into account changes in fixed costs and profits, we calculate the profitability threshold:
Vyr= 420*118= 49560 thousand rubles.
And per= 118*165 = 19470 thousand rubles
VM= 49560 – 19470 = 30090 thousand rubles
kVM
= 165/420 = 0,39
And post= 11655 thousand rubles
3 total= 19470+11655 = 31125 thousand rubles
Profit= 49560-31125 = 18435 thousand rubles
PR RUR= 11655/0.39 = 29884.62 thousand rubles
PR unit
= 11655/(420-165) = 45,71
When it changes variable costs the threshold profit amounted to 29,884.62 thousand rubles, the profitability threshold in physical terms amounted to 45.71 thousand units.
A graph of the profitability threshold, reflecting a 50% change in profit due to changes in fixed costs, is presented in Figure 2
4. Let's determine the profitability threshold for an increase in profit by 50% due to a change in variable costs per unit.
Vyr= 420*118= 49560 thousand rubles.
And per= 49560-17800-18435 = 13325 thousand rubles
VM= 49560 – 13325 = 36235 thousand rubles
kVM
= (420-165)/420 = 0,61
And post= 17800 thousand rubles
3 total= 13325+17800 =31125 thousand rubles
Profit= 49560-31125 = 18435 thousand rubles
PR RUR= 17800/0.61 = 29180.33 thousand rubles
PR unit
= 17800/(420-165) = 69,80
When variable costs changed, the threshold profit amounted to 29,180.33 thousand rubles, the profitability threshold in physical terms was 69.80 thousand units.
The profitability threshold graph, reflecting a 50% change in profit due to changes in variable costs, is presented in Figure 3
When profits increase by 50%, the profitability threshold decreases. The smallest change occurs due to changes in the selling price, the largest decrease in the profitability threshold occurs due to changes in fixed costs.
Therefore, we can conclude that it is more expedient to increase profits while reducing fixed costs. This also leads to a decrease in the profitability threshold, which increases the company’s chances in the market to make a profit.
Introduction
1. Baumol and Miller-Orr models for managing the cash balance on a current account
2. Practical part
Conclusion
Bibliography
Introduction
IN modern conditions In business management, many enterprises are placed in conditions of independent choice of strategy and tactics for their development. The enterprise's self-financing of its activities has become a top priority.
In a competitive and unstable environment external environment it is necessary to quickly respond to deviations from the normal activities of the enterprise. Cash flow management is the tool with which you can achieve the desired result of an enterprise - making a profit.
A firm's cash flow is a continuous process. For every application monetary funds there must be a corresponding source. Broadly speaking, a firm's assets represent net uses of cash, while liabilities and equity are net sources. For a running enterprise, there really is no starting point and ending point. The final product is the total cost of raw materials, fixed assets and labor, ultimately paid for in cash. The products are then sold either for cash or on credit. Credit sales generate accounts receivable, which are eventually collected and converted into cash. If the selling price of a product exceeds all expenses (including depreciation of assets) for a certain period, then a profit will be made for this period; There is no mudflow - a loss. Cash levels fluctuate over time depending on production schedules, sales volumes, accounts receivable collections, capital expenditures, and financing.
On the other hand, raw materials inventories, work in progress, inventories; finished products, accounts receivable and trade credit payable fluctuate depending on sales, production schedule and policies regarding major debtors, inventory and trade credit outstanding. The cash flow statement is a method by which we examine the net change in funds between two points in time. These moments correspond to the start and end dates financial report, no matter what period the study relates to - a quarter, a year or a five-year period. The statement of sources and uses of cash describes net rather than gross changes in financial position at various dates. Total changes are all changes that occur between two reporting dates, while net changes are defined as the result of total changes.
The purpose of this work is to study the methodology of enterprise cash management.
1. Baumol and Miller-Orr models for managing the cash balance on a current account
Calculation of the optimal cash balance
Cash as a type of current assets is characterized by certain characteristics:
routine - cash is used to pay off current financial obligations, therefore, there is always a time gap between incoming and outgoing cash flows. As a result, the enterprise is forced to constantly accumulate available funds in a bank account;
precaution - the activities of the enterprise are not strictly regulated, so cash is needed to cover unexpected payments. For these purposes, it is advisable to create an insurance cash reserve;
speculative - funds are needed for speculative reasons, since there is always a small probability that an opportunity for profitable investment will unexpectedly arise.
However, cash itself is a non-profitable asset, so the main objective policy for their management - maintaining them at the minimum required level sufficient for the implementation of effective financial and economic activities of the organization, including:
timely payment of supplier bills, allowing you to take advantage of the discounts they provide on the price of goods;
As noted above, if there is a large money supply the organization incurs opportunity costs (refusal to participate in any investment project). With a minimum reserve of funds, costs arise to replenish this reserve, the so-called maintenance costs ( business expenses caused by the purchase and sale of securities, or interest and other expenses associated with borrowing to replenish the cash balance). Therefore, when solving the problem of optimizing the balance of money in a current account, it is advisable to take into account two mutually exclusive circumstances: maintaining current solvency and obtaining additional profit from investing free funds.
There are several basic methods for calculating the optimal cash balance: mathematical models Baumol-Tobin, Miller-Orr, Stone, etc.
Baumol-Tobin model
The most popular model for managing liquidity (the balance of funds in a current account) is the Baumol-Tobin model, built on the conclusions reached by W. Baumol and J. Tobin independently of each other in the mid-50s. The model assumes that commercial organization maintains an acceptable level of liquidity and optimizes its inventory.
According to the model, the enterprise begins to operate with the maximum acceptable (expedient) level of liquidity for it. Further, as work progresses, the level of liquidity decreases (cash is constantly spent over a certain period of time). The company invests all incoming funds in short-term liquid securities. As soon as the level of liquidity reaches a critical level, that is, it becomes equal to a certain specified level of security, the enterprise sells part of the purchased short-term securities and thereby replenishes the cash reserve to its original value. Thus, the dynamics of the company’s cash balance is a “sawtooth” graph (Fig. 1).
Rice. 1. Graph of changes in the balance of funds in the current account (Baumol-Tobin model)
When using this model, a number of limitations are taken into account:
1) at a given period of time, the organization’s need for funds is constant, it can be predicted;
2) the organization invests all incoming funds from the sale of products in short-term securities. As soon as the cash balance falls to an unacceptably low level, the organization sells part of the securities;
3) the organization’s receipts and payments are considered constant, and therefore planned, which makes it possible to calculate net cash flow;
4) the level of costs associated with the transformation of securities and other financial instruments in cash, as well as losses from lost profits in the form of interest on the proposed investment free funds.
According to the model under consideration, to determine the optimal cash balance, you can use the optimal order quantity (EOQ) model:
F - fixed costs for the purchase and sale of securities or servicing a loan received;
T is the annual need for funds necessary to maintain current operations;
r is the value of alternative income (interest rate of short-term market securities).
Miller-Orr model
The disadvantages of the Baumol-Tobin model noted above are mitigated by the Miller-Orr model, which is an improved EOQ model. Its authors, M. Miller and D. Orr, use a statistical method when constructing the model, namely the Bernoulli process - a stochastic process in which the receipt and expenditure of funds over time are independent random events.
When managing the level of liquidity, the financial manager must proceed from the following logic: the cash balance changes chaotically until it reaches the upper limit. Once this happens, it is necessary to purchase a sufficient number of liquid instruments in order to return the cash level to some normal level (the reversion point). If the cash reserve reaches the lower limit, then in this case it is necessary to sell liquid short-term securities and thus replenish the liquidity reserve to the normal limit (Fig. 2).
The minimum value of the cash balance on the current account is taken at the level of the safety stock, and the maximum - at the level of three times its size. However, when deciding on the issue of the range (the difference between the upper and lower limits of the cash balance), it is recommended to consider the following: if the daily variability of cash flows is large or the fixed costs associated with the purchase and sale of securities are high, then the enterprise should increase the range of variation and vice versa. It is also recommended to reduce the range of variation if there is an opportunity to generate income due to the high interest rate on securities.
When using this model, one should take into account the assumption that the costs of buying and selling securities are fixed and equal.
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One of the most famous money management models is the Baumol model. It was developed in 1952 by William Baumol (W.J. Baumol) based on the inventory management model EOQ (Economic Order Quantity). Basic assumptions of the Baumol model:
1. The enterprise’s sustainable need for funds;
2. Everything cash receipts the company immediately invests in highly liquid securities;
3. The cost of converting investments into cash does not depend on the amount being converted (fixed for one transaction);
4. The company begins operations with maximum reasonable cash balances.
Baumol's model is applicable in cases where an enterprise can predict its cash needs with a sufficient degree of certainty. In this case, as already noted, it is assumed that the enterprise begins to operate with the maximum appropriate level of funds Q+m. Then the enterprise evenly (due to sustainable needs) spends these funds over a certain period of time (see Fig. 8.5).
Rice. 8.5. Changes in enterprise cash balances according to the Baumol model
As soon as cash balances fall to the minimum allowable safety stock m, the company sells part of its short-term investments and restores its cash reserve to its initial level.
In this case, it is assumed (see assumption 2) that the funds received by the enterprise as a result of the sale of products, goods, and services are transferred as received into short-term investments.
Let us introduce the following notation:
V- the projected total need for funds for the period (usually a year);
c- costs of converting short-term investments into cash (transaction costs);
r- average annual return on short-term investments.
The number of conversions of securities into cash during the period will be .
Total enterprise costs TC related to cash management for the period will be:
where the first term represents transaction costs and the second term represents opportunity costs.
To determine the amount of replenishment of cash balances Q opt., with which TC minimally differentiate the function TC(Q) By Q:
Equating expression (8.2) to zero, we find the value Q, corresponding to the minimum of the function TS:
A graphical illustration of cost minimization using the Baumol model is presented in Figure 8.6.
Rice. 8.6. Minimizing costs according to the Baumol model.
Graphs in Fig. 8.6 are built under the following conditions: V= 2000 thousand rubles, c= 0.1 thousand rubles, r= 5%, m= 50 thousand rubles.
Calculation using formula (8.8.3) showed that Q opt≈ 89.44 thousand rubles. The same result can be obtained graphically with an acceptable degree of accuracy.
Miller-Orr model
In 1966, Merton Miller and Daniel Orr (M.H.Miller, D.Orr) developed a money management model that is much closer to reality than Baumol's model. It helps answer the question: how should a company manage its cash reserves if it is impossible to predict the daily outflow or inflow of cash? Miller and Orr used the Bernoulli process to build the model - a stochastic process in which the receipt and expenditure of money from period to period are independent random events.
The basic premise of the Miller-Orr model is that the distribution of daily cash flow balances is approximately normal. Actual value the balance on any day may correspond to the expected value, be higher or lower than it. Thus, the cash flow balance varies randomly from day to day; no tendency for its change is envisaged.
The model is implemented in several stages [ Kovalev]:
1. The minimum amount of funds is established ( L), which it is advisable to constantly have in the current account (determined by experts based on the average need of the enterprise to pay bills, possible demands of the bank, creditors, etc.).
2. Based on statistical data, the variation in the daily receipt of funds to the current account (σ 2) is determined.
3. Opportunity costs are determined r- expenses for storing funds in a current account (usually they are taken in the amount of the daily income rate on short-term securities traded on the market) and expenses c on the mutual transformation of cash and securities (this value is assumed to be constant per transaction).
4. Calculate the range of variation in the balance of funds on the current account R according to the formula
5. Calculate the upper limit of funds in the current account H, above which it is necessary to convert part of the funds into short-term securities:
H=L+R (8.5)
6. Determine the return point ( Z) - the amount of funds balance on the current account, to which it is necessary to return if the actual balance of funds on the current account goes beyond the boundaries of the interval ( L, H):
An example of a graph depicting the dynamics of funds using the Miller-Orr model is presented in Fig. 8.7.
Rice. 8.6. Dynamics of enterprise cash balances using the Miller-Orr model [ Kovalev, s. 547].
At a moment in time t 1 there is a purchase of securities in the amount of ( H – Z), and at the moment t 2 securities are sold with net proceeds ( Z – L).
When using the Miller-Orr model, you should pay attention to the following points[ Brigham, Gapenski, p.312-313].
1. The target account balance is not the average between the upper and lower limits, since its value more often approaches its lower limit than its upper limit. If you set the target balance to average between limits, it will minimize transaction costs, but if it is set below the average level, the result will be a reduction in the magnitude of opportunity costs. Based on this, Miller and Orr recommend setting the target balance in the amount if L= 0; this minimizes overall costs.
2. The size of the target cash balance and, therefore, the limits of fluctuation, increase with growth c and σ 2 ; increase c makes it more expensive to reach the upper limit, and a larger σ 2 leads to both being reached more often.
3. The target balance decreases as it increases r; since if the bank interest rate increases, then the value of opportunity costs increases and the company tends to invest funds rather than keep them in an account.
4. The floor does not have to be zero, but can be positive if the firm has to maintain a compensating balance or management prefers to maintain a safety stock of cash.
5. Experience in using the described model has shown its advantages over purely intuitive money management; however, if the company has several alternative options for investing temporarily free funds, and not the only one in the form of purchasing, for example, government securities, then the model ceases to work.
6. The model can be supplemented with the assumption of seasonal fluctuations in revenue. In this case, cash flows will not follow a normal distribution, but will take into account the likelihood of an increase or decrease in the balance of funds, depending on whether the company is experiencing a period of decline or recovery. Under these assumptions, the target cash balance will not always be between the upper and lower limits.
Stone's model
Stone's model, unlike the Miller-Orr model, places more emphasis on managing the target residue rather than defining it; at the same time, they are similar in many ways [ Brigham, Gapenski, p. 313-314]. The upper and lower limits of the account balance are subject to change depending on information about cash flows expected in the next few days. The concept of Stone's model is presented in Fig. 8.7. Just like in the Miller-Orr model, Z represents the target account balance that the firm strives for, and H And L- the upper and lower limits of its fluctuations, respectively. In addition to those indicated, Stone’s model has external and internal control limits: N And L- external, and ( H – X) And ( L + x) - internal. Unlike the Miller-Orr model, where immediate action is taken when control limits are reached, this does not always happen in the Stone model.
Rice. 8.7. Dynamics of cash balances using the Stone model [ Brigham, Gapenski, p. 313].
Let's assume that the account balance has reached the outer upper limit (point A in Fig. 8.7.) at the moment of time t. Instead of automatically converting the value ( H– Z) from cash into securities, the financial manager makes a forecast for the next few days (in our case, five). If the expected balance at the time ( t+ 5
) will remain above the internal limit ( H– x), for example its size is determined at the point IN, then the sum ( H– Z) will be converted into securities. Further dynamics of the cash balance in this case will correspond to the thick line starting at the time t.If the forecast shows that at the moment ( t+ 5
) value cash balance will correspond to the point WITH, then the firm will not buy securities. Similar reasoning is true for the lower limit.
Thus, the main feature of Stone's model is that the company's current actions are determined by its forecast for the near future. Consequently, reaching the cap will not trigger an immediate transfer of cash into securities if relatively high cash burns are expected in the coming days; thereby minimizing the number of conversion operations and, consequently, reducing costs.
Unlike the Miller-Orr model, the Stone model does not specify methods for determining target cash balances and control limits, but they can be determined using the Miller-Orr model, and x and the period for which the forecast is made - with the help of practical experience.
A significant advantage of this model is that its parameters are not fixed values. This model can take into account seasonal fluctuations, since the manager, making a forecast, evaluates the characteristics of production in individual periods.
The disadvantage of Stone's model is the emergence of subjectivity. If the manager makes a mistake with the forecast, the company will incur storage costs. excess amount funds (in the case of an upper limit) or by short period of time will lose liquidity (in the case of a lower limit). However, correct short-term forecasting of the size of the cash balance can reduce transaction costs.
Simulation modeling
Simulation modeling is the most accurate of the models considered, but at the same time the most labor-intensive. The modeling technique is described by Brihgem and Gapenski ([ Brigham, Gapenski, p. 314-316].
Modeling begins with drawing up a preliminary cash flow budget. After this, an assumption about the probabilistic nature of the indicators is introduced into the forecasting methodology.
It is expected to calculate the volume of monthly sales ( S) random variable with normal distribution. Let us denote the coefficient of variation in the volume of monthly sales as CV, and its standard deviation is as s S. We will also assume that over time the relative variability of sales volume is constant.
Then the standard deviation of sales volume for i The th month will be equal to:
Where S i- volume of sales i month.
The receipt of revenue from sales is associated with the actual, and not with the expected volume of sales, that is, the payment receipt scheme is based on information about actual sales that took place in the past.
The essence of the Monte Carlo method is based on studying the operation of a model of a system when it receives random input data that has specified characteristics (type of distribution, dispersion, etc.) and restrictions. In our case, it is necessary to model (at a given level of significance) the value of the enterprise's possible cash shortage by month and plan the corresponding values as the target balance. The key indicator here is the significance level set by the manager - the probability with which the results obtained (target remainder) are statistically significant. The recommended level is around 90%.
Brigham and Gapensky emphasize that it is possible to introduce the assumption that monthly sales volumes are dependent on each other; that is, for example, if the actual implementations in i-month will be below their expected level, this should serve as a signal of a decrease in sales revenue in the following months. IN in this case the uncertainty of cash flows will increase and, therefore, to ensure the desired level of security, it is necessary to set the target cash balance at a relatively higher level [ Brigham, Gapenski, p. 316].
The main advantage of simulation modeling is the relatively high accuracy of the results obtained.
However, it should be noted that the use of this method for financial forecasting in practice it is almost impossible without the use of a computer. In addition, to obtain reliable results, it is advisable to have information on the company's cash flows for at least two previous years to obtain a representative sample of the initial data.
Accounts receivable management.
Accounts receivable, or accounts receivable, are one of the most important and significant elements of the current assets of an enterprise. Modern trade practice increasingly relies on the buyer receiving a deferred payment for the delivered products, which results in the formation of significant accounts receivable for the seller (supplier).
The level of receivables of an enterprise is determined by:
· Type of products sold
· Degree of market saturation with this type of product
· Payment system adopted at a particular enterprise
General economic factors
Accounts receivable management is a classic example of a trade-off between risk and profitability: the optimal level of accounts receivable is determined based on the trade-off between increasing sales volume and, as a consequence, profitability as a result of reducing credit requirements to customers, and in parallel with rising costs of financing an increasing level of receivables and an increase in probable losses on bad debts. At the same time, the basic laws of financial management are clearly followed: the expected profitability changes in inverse proportion to the liquidity of the asset (in this case, accounts receivable) and in the same direction as the risk. At the same time, attempts popular in the domestic literature to classify debts for shipped products as an object of accounts receivable management, which significantly exceed in their urgency the industry average indicator of the receivables circulation period, or even a period of 12 months, are obviously untenable: such “receivables” are already cannot be considered as an integral part of current assets.
An important element of accounts receivable management is the ranking of accounts receivable according to the timing of their occurrence (compiling a so-called “aging register” of accounts receivable), as well as monitoring its turnover (turnover of funds in settlements). The latter is carried out on the basis of a number of turnover indicators, which are discussed in the corresponding section of the course.
A very popular tool for monitoring accounts receivable is to compare the average repayment period with the average repayment period of debt on supplier accounts (accounts payable). Despite the conventionality of such a comparison (due, in particular, to the different nature of obligations and, in some cases, different volumes), it can show whether the enterprise is a net creditor, financing at its own expense investments in the working capital of its customers, or, conversely, a net creditor. a borrower using funds from its counterparties. It should be noted here, however, that the popular arguments among many domestic theorists about the management of receivables based on an analysis of the operating and financial cycles of an enterprise2, in practice, face significant limitations. The operating cycle of an enterprise is, as is known, equal, on the one hand, to the sum of the duration of the production process3 and the average repayment period (circulation period) of receivables, and on the other hand, to the sum of the duration of the financial cycle and the average repayment period (circulation period) of debt on supplier accounts (accounts payable ). If we approach the problem of managing receivables “mechanically”, then the problem of minimizing the duration of the financial cycle4 (namely, during this period the enterprise’s funds are diverted from circulation and the enterprise has to use financing from its own funds or attract a loan) can be solved in two ways5. On the one hand, it is possible to tighten the conditions for the sale of products on credit, which should reduce the period of circulation of receivables, but at the same time reduce the volume of sales (profit). On the other hand, you can “delay” the payment of supplier bills. Within certain limits, this may “work”, but if this technique is abused, the supplier will be objectively forced to reconsider the terms of delivery or simply include the cost of financing its increased receivables in the delivery price. The result is increased costs and decreased profits. The art of management here consists precisely in avoiding, if possible, both dangers.
From a practical point of view, the most important tool for managing receivables of an enterprise is its credit policy, represented by two interrelated activities: providing deferred payments and debt collection.
The credit policy of an enterprise involves making decisions on five main issues [ Levy, Sarnat]:
1. Determination of the period for which payment is expected to be deferred;
2. Determination of lending instruments, i.e. legal form processing a commercial loan;
3. Formation credit standards- a set of criteria and procedures for determining “good” and “bad” in terms of providing a deferment on customer payments;
4. Collection policy - certain procedures for monitoring receivables and procedures for action in cases of delays in payments must be established;
5. Incentives that can be offered to customers to speed up payment of bills (usually discounts).
In conditions developed countries the seller will rely on knowledge credit history client, to study the client’s financial statements, etc. In domestic conditions, the main sources of information about the creditworthiness of clients are
· Information from confidential sources - for example, a bank where a potential client is served.
· Information from supplier companies that have already worked with this client.
For large contracts, special investigations by the security service may be carried out.
An analysis of the current situation in Russia shows that spontaneously, based on the interaction of market factors, domestic enterprises are developing their own credit policy, already quite comparable with that which has developed in countries with developed market economy. The result is the establishment of a certain balance between sales on prepayment terms, with payment upon delivery and with deferred payment - a balance, the violation of which in one direction leads to a drop in sales volume, in the other direction to an unjustified increase in the risk of non-receipt of payment.
Inventory Management
Enterprise inventory management is the responsibility of the production manager rather than the financial manager. However, due to certain traditions, as well as the fact that many small and medium-sized firms simply do not have inventory management specialists, this function is often assigned to the financial manager. In addition, even in the presence of an advanced inventory management service at the enterprise, the financial manager is left with an extremely important and non-trivial side of the problem - assessing the cost of investments in inventory. It is the accounting of the cost of investment in inventories that fundamentally distinguishes modern models managing them from traditional rationing procedures.
From the point of view of financial management, the management of investments in inventories has certain specifics compared to the management, for example, of investments in fixed assets. These features, in particular, are expressed in the following [ Levy, Sarnat]:
· In practice, as a rule, it is impossible to unambiguously assess the profitability of investments in inventories; as a result, the main goal of inventory management is to minimize the costs of maintaining them;
·Decisions related to inventory management are repetitive; these decisions determine how often And how much stocks must be renewed.
The decision regarding the optimal inventory level must be based on a trade-off between the costs of carrying unreasonably high level inventories and the risk of downtime and delays in production and sales of products due to their depletion.
Without intending to provide an overview of existing methods and models of inventory management (this is the subject of a separate course), we will focus on the classification of costs associated with inventories and formalize the most well-known management model.
The first group includes costs that increase with increasing inventory volume:
· Cost of financing investment in reserves;
· Cost of storage;
· Processing costs (moving, delivery to places of sale, etc.);
· Inventory insurance;
· Property tax;
· Obsolescence and loss of value.
Costs that decrease with increasing inventory volume (per unit of inventory) can be summarized into three subgroups:
· Costs of placing an order (fixed per order);
· Loss of discounts provided depending on the volume of purchases;
· Costs of possible depletion of reserves.
The most well-known inventory management model that implements the compromise formulated above is the well-known model EOQ(Wilson formula), according to which the optimal order size Q* is
Q* = 2SC 2 (8.8)
In formula (8.8) through S indicates the annual demand for reserves (in units), through C 1– variable costs per unit of inventory, through C 2– fixed costs per order.
Literature
1. Brigham Y., Gapenski L. Financial management: Complete course. In 2 volumes. T.2 /Trans. from English edited by V.V. Kovaleva. - St. Petersburg: Economic school, 1997.
2. Van Horn J. Fundamentals of financial management: Trans. from English/Ed. I.I. Eliseeva. - M.: Finance and Statistics, 2000.
3. Kovalev V.V. Introduction to financial management. - M.: Finance and Statistics, 2004.
4. Financial management: theory and practice: Textbook / Ed. E.S. Stoyanova. - 5th ed., revised. and additional - M.: Publishing house "Perspective", 2000.
5. Cheng F. Li, Joseph I. Finnerty. Corporate finance: theory, methods and practice. Per. from English - M.: INFRA-M, 2000.
6. Shim Jay K., Siegel Joel G. Financial management / Translation from English. - M.: Information and Publishing House "Filin", 1996.
7. Levy H., Sarnat M. Principles of Financial Management. – Prentice Hall, Englewood Cliffs, 1988.
[Kovalev, 1999]. The essence of these models is to give recommendations on the corridor for variation of the cash balance, going beyond which involves either converting cash into liquid securities, or the reverse procedure.
N.B. average cost reserves can be calculated using the Baumol model
The most popular theory of money demand, which considers it from the point of view of optimizing cash reserves, is based on the conclusions reached independently by William Baumol and James Tobin in the mid-50s. Today this theory is widely known as the Baumol-Tobin model. They pointed out that individuals maintain cash reserves in the same way that firms maintain inventories. At any this moment a household keeps some of its wealth in the form of money for future purchases.
At the same time, it is possible to obtain an algebraic expression of the demand for money in the Baumol-Tobin model. This equation is interesting because it allows us to represent the demand for money as a function of three key parameters of income, interest rate and fixed costs
There are theories of the demand for money that especially highlight the function of money as a medium of exchange. These theories are called transaction theories of money demand. In them, money plays the role of a subordinate asset, accumulated only for the purpose of making purchases. Thus, the Baumol-Tobin model analyzes the benefits and costs of holding cash. The benefit is that there is no need to visit the bank every time you make a purchase (transaction). The total costs are determined by the shortfall in interest on possible savings accounts (d), and the client’s time to visit the bank based on his earnings (F). If Y is the amount of annual spending on purchases planned by an individual, then at the beginning of the year this amount will be equal to Y, at the end of the year - 0, and its average annual value will be Y / 2. If an individual visits the bank not once a year, but N times, then the average annual value of the amount of cash in his hands will be Y/(2xN). The interest lost by him will be (gxU)/(2x.Y), and the costs of visiting the bank will be equal to FxN. The greater the number of visits to the bank (N), the higher the associated costs, but the lower the amount of lost interest.
Baumol's model. According to U. Baumol, the balance of funds in the account is in many ways similar to the balance of inventory, therefore, to optimize it, the optimal order batch model can be used. The optimal amount of funds in the account is determined using other variables C - the amount of funds in liquid securities or as a result of a loan C/2 - the average balance of funds in the account C - the optimal amount of funds that can be received from the sale of marketable securities or as a result loan C /2 - optimal average account balance F - transaction costs for the purchase and sale of securities or servicing the loan received per transaction T - total
Thus, in accordance with the Baumol model, the balances of DA for the coming period are determined in the following sizes
The most widely used for these purposes is the Baumol Model, who was the first to transform the previously discussed EOQ Model for cash balance planning. The starting points of the Baumol Model are the constancy of the cash flow, storage of all reserves monetary assets in the form of short-term financial investments and a change in the balance of monetary assets from their maximum to a minimum equal to zero (Fig. 5.17.)
Figure 5.17. formation and expenditure of the balance of funds in accordance with the Baumol Model.
Taking into account the losses of the two types considered, an optimization Baumol Model is constructed, which makes it possible to determine the optimal frequency of replenishment and the optimal size of the cash balance, at which the total losses will be minimal (Fig. 5.18.)
The mathematical algorithm for calculating the maximum and average optimal amounts of the cash balance in accordance with the Baumol Model has the following form
An example must be determined based on the Baumol Model average and maximum size cash balances based on the following data, the planned annual volume of cash turnover of the enterprise is 225 thousand conventional units. den. eg. the cost of servicing one operation of replenishing funds is 100 conventional units. den. eg. The average annual interest rate on short-term financial investments is 20%.
In accordance with the Baumol model, we determine
Baumol's model is simple and sufficiently acceptable for enterprises whose cash expenses are stable and predictable. In reality, this rarely happens; the balance in the current account changes randomly, and significant fluctuations are possible.
What is the fundamental difference between the Baumol model and the Miller-Orr model?
The Baumol model is an algorithm that allows you to optimize the size of the average balance of an enterprise's monetary assets, taking into account the volume of its solvent turnover, the average interest rate on short-term financial investments and the average amount of costs on short-term investment operations.
Baumol's model. Let's assume that an organization has a certain amount of cash, which it constantly spends on paying supplier bills, etc. In order to pay bills on time, a commercial organization must have a certain level of liquidity. The price for maintaining the required level of liquidity is taken to be possible income from investing the average balance of funds in government securities. The basis for this decision is the assumption that government securities are risk-free (i.e., their degree of risk can be neglected). The commercial organization invests funds received from the sale of products (goods, works, services) in government securities. At the moment when funds run out, the stock of funds is replenished to the initial amount.
When a household takes the entire required amount with one large-scale withdrawal M = P x Q, it meets its own needs, but loses interest. In the Baumol-Tobin model, we can obtain an algebraic expression for the demand for money MD = M/2. The peculiarity of the equation is that it allows you to present the demand for money (when recalculated per one visit to the bank) as a function consisting of three key parameters of fixed costs Pb, income Q, interest rate G
Baumol’s model states that when a firm has excess money in its account in excess of the calculated amount of the optimal reserve, it uses it to buy short-term securities in order to generate income, and when the stock of money decreases, it sells part of these securities, increasing the stock of money to the optimal level.
The Baumol model is suitable for stable predictable cash expenses and revenues, it does not take into account seasonal or random fluctuations, i.e. it simplifies the real situation. Later, other models were developed that take into account the daily variability of cash flows (for example, the Miller-Orr model, 1966). However, all formalized models have certain limitations, therefore, in the practice of cash management, they are used as auxiliary ones to establish the optimal amount of funds.
Let us turn to the analysis of the properties of the transaction demand function for money obtained from the Baumol-Tobin model. Firstly, as follows from formula (4), the demand for money negatively depends on the interest rate. This is explained by the fact that an increase in the interest rate leads to an increase in lost interest payments and thereby encourages the individual to go to the bank more often and hold less cash.
In addition to the two traditional factors discussed above that influence the demand for money, we can highlight one more parameter, which, according to the Baumol-Tobin model, influences
Thus, the velocity of money circulation depends positively on
, (2)
Therefore, we can conclude that it is more expedient to increase profits while reducing fixed costs. This also leads to a decrease in the profitability threshold, which increases the company’s chances in the market to make a profit.