Miller-Orr cash management model
In normal circumstances, cash-flows of a business go up and down in fairly random manner. Therefore, instead of assuming that daily balances cannot be predicted because they meander in a random fashion. This gives rise to a cash position like the one below;
Rather than decide how often to transfer cash into the account, the treasurer sets upper and lower limits which, when reached, trigger cash adjustments sending the balance back to return point selling short-term investments.
In general, the limits will be wider apart when daily cash flows are highly variable, transaction costs are high and interest on short-term investments are low. The following formulae are used:
As long as the cash balance is between the upper limit and the lower limit, no transaction is made.
At point (x) the firm buys marketable securities. At point Y, the firm sells securities and deposits the cash in the account.