• Global Frameworks: AFP Certified Treasury Professional (CTP) Reference Guidelines.

1. Motives for Holding Cash Reserves
According to Keynesian economic theory, corporations hold liquid cash assets for three main operational reasons:
  • Transactions Motive: Maintaining cash to clear predictable daily business expenses, such as payroll, supplier invoices, and tax liabilities.
  • Precautionary Motive: Holding a financial safety cushion to absorb unexpected cash shortfalls or operational emergencies.
  • Speculative Motive: Retaining cash reserves to capitalize on sudden, opportunistic business advantages, such as acquiring a distressed competitor at a discount.

2. Analytical Cash Optimization Models
Treasury managers use mathematical models to find the ideal cash balance that minimizes both the transaction costs of liquidating securities and the opportunity cost of holding low-yield cash:
  • The Baumol-Allais-Tobin (BAT) Model: Assumes a company uses cash at a steady, predictable rate over time. The optimal cash transaction size (Z) is calculated using a formula similar to the economic order quantity (EOQ):

    Z = √( (2 × T × F) / i )Where T = total cash needed for the year, F = fixed transaction fee to sell marketable securities, and i = opportunity interest rate on marketable securities.
  • The Miller-Orr Model: Designed for real-world scenarios where daily cash flows fluctuate unpredictably. The model establishes an upper control limit, a lower control limit, and a target return point based on cash volatility and transaction costs:

Cash Balance
  â–²
  ├─────────────────────────────────── Upper Control Limit (Sell Cash / Buy Securities)
  │         /\        /\
  │        /  \  /\  /  \
  ├───────/────\/──\/────*──────────── Target Cash Return Point (Z)
  │  /\  /                \
  │ /  \/                  \
  ├─┴───────────────────────\───────── Lower Control Limit (Buy Cash / Sell Securities)
  └───────────────────────────────────► Time

When the cash balance hits the upper limit, the treasury buys securities to return to target Z; when it hits the lower limit, the treasury sells securities to replenish cash.
 
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