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Wang - Financial Management in The Public Sector.119-131.5-7
Wang - Financial Management in The Public Sector.119-131.5-7
Wang - Financial Management in The Public Sector.119-131.5-7
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Cash balance
Invest this amount
Upper limit
Return point
Lower limit
Time
Replenish this amount of cash
the transaction cost. Rather than hiring an external broker, an organization
could choose to manage its cash internally by using its own personnel, and
then the transaction cost is the cost associated with the hire and use of
these people. Daily interest rate (I) is the daily rate of return on an investment. In public organizations, where safety is a major concern for investment, the interest rate for U.S. treasury bills, one of the safest investment
choices, can be used.
The variance of daily net cash flow (V) is used to measure the fluctuation
of cash balance. A larger value of V indicates that a cash flow fluctuates
more. It can be calculated by using daily net cash flow (Daily Deposits
Daily Withdrawals) for a selected number of days (e.g., 100 days), and by
computing the variance of the cash flow for these days. It is important to note
that the selection of these days should reflect the true fluctuation of cash
flows for an organization at a given time (e.g., a year). If the organization has
different patterns of cash flows in different seasons of a year, then the days
selected should include days in different seasons. Let us first look at a simple
example to illustrate what the variance is, and then use Excel in the calculation. Let us say that, during the past five days, we have a series of net cash
flows of $10.00 in Day 1, $20.00 in Day 2, $5.00 in Day 3, $7.00 in Day 4,
and $10.00 in Day 5. The five-day average is ($10.00 + $20.00 $5.00 +
$7.00 $10.00)/5 = $4.40. Table 8.4 includes the statistics needed to compute the variance.
The total of the difference squared is 31.36 + 243.36 + 88.36 + 6.76 +
207.36 = $577.20. Variance is $577.20/4 = $144.30, where 4 is the number
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Table 8.4
An Example of Computing Variance of Daily Net Cash Flow
Day
1
2
3
4
5
Net cash
flow ($)
(1)
Average
(2)
Difference
(3) = (1) (2)
Difference
squared
Square of (3)
10.00
20.00
5.00
7.00
10.00
4.40
4.40
4.40
4.40
4.40
5.60
15.60
9.40
2.60
10.44
31.36
243.36
88.36
6.76
207.36
V =
(X
)2
i =1
(n 1)
CASH MANAGEMENT
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