An Unequal-Period Model for Cash Management Decisions

A lack of synchronization between cash inflows and outflows presents the problem of investing positive net flows and financing negative net flows. In addition to the basic investment-financing issue there are other interrelated problems such as the payment schedule and the minimal cash balance that directly affect cash management decisions. Previous attempts to solve these problems have imposed constraints that limit their application. The purpose of this study is to develop an applicable method for solving the cash management problem by deriving a linear programming model that is divided into unequal periods. The unequal time division maintains the day-to-day aspect of the problem while reducing the number of periods and variables to a manageable size. Decision variables are divided into four groups: the payment schedule, securities transactions, short-term financing, and the cash balance. The model determines the optimal values of these variables subject to institutional constraints and within a framework of managerial risk preferences that are expressed as subjective constraints and subsequently evaluated by the dual model. Although a certainty assumption is made, inputs are analysed by sensitivity analysis and the dual model, while the effects of uncertainty are further reduced by the unequal time structure of the model. Tests of the model indicate that it is both profitable and generally applicable by most business firms.