ADONGO’S INVENTORY MODEL OF
UNCERTAINTY
In general
theory of employment interest and money, there are strictly three reasons why
liquidity is important. These are precautive motive, speculative motive and
transaction motive. In speculative motive, cash is needed to hold in order to
bargain purchases that might arise, attracting interest rate and favorable
exchange rate fluctuations. The precautive motive to act as a financial
reserve. Also cash is needed to satisfy the transactions motive, we need cash
in order to pay bills.
Cash
management refers to a broad area of finance involving the collection, handling
and usage of cash. In Banking, cash management or treasury management, is a
marketing term for certain service related to cash flow offered primarily to
larger business customated clearing house facilities.
Empirically;
disbursements can be only partially managed because dates differ and costs
cannot be predicted with certainty. In view o this, I have had made an attempt
to design model that deal with uncertainty and facilitates the finance manager
to minimize carrying cost and maintain cash. In my model we need to know these
things.
C*=optimum cash balance
F=the fixed cost of selling securities to replenish cash
A=the total amount of new cash needed for transaction
purposes over the relevant planning period
K=the interest rate on marketable securities
H=risk of transaction
The total cost, T of the transaction is;
T=2AF/HC*
Where the
risk of transaction and optimum cash balance are;
C*=√(2AF/HK)
H=2AF/C*2K
For example,
if F=$1000, A=$31200000, K=0.10 and c*=$789936.71
The risk of
the transaction is;
H=2*31200000*1000/789936.712*0.10
H=0.99999999
H≈1.00
The H=1, means there is no risk (or
certainty).
To calculate
the total cost, we have;
T=2*31200000*1000/789936.71*1
T=$78993.67
