Orgler’s Model Homework Help

Orgler's Model

 According to this model, an optimal cash management strategy can be determined through the use of a multiple linear programming model. The' construction of the model comprises three sections: (1) selection of the appropriate planning horizon, (2) selection of the appropriate decision variables and (3) formulation of the cash management strategy itself, The advantage of linear programming model is that it enables coordination of the optimal cash management strategy with the other operations of the finn such as production and with less restrictions on working capital balances.

The model basically uses one year planning horizon with twelve monthly periods of its simplicity. It has four basic sets of decisions variables which influence cash management of a find and which must he incorporated into the linear programming model of the are:

(i) payment schedule

ii) short-term financing,

iii) purchase and sale of marketable securities and

(iv) cash balance itself. The formulation of the model requires that the financial managers first specify an objective function and then specify a set of constraints.

Orgler's objective function is to minimize the horizon value of the net revenues from the cash budget over the entire planning period'. Using the assumption that all revenues generated are immediately re-invested and that any cost is irremediably financed, the objective function represents the value of the net from over the planning period the objective function recognises each operation of the firm that generates cash inflows or cash outflows as adding or subtracting profit opportunities for the firm from its cash management operations, In the objective function, decision variables which cause inflows, such as payments on receivables, have positive co-efficient, while decision variables which generate cash outflows, such .as interest on short-term borrowings have negative coefficients, The purchase of marketable securities would, for example, produce revenue and thus have a positive co-efficient while the sale of those securities would incur conversion costs and have a negative co-efficient.

The constraints of the model could be (j) institutional or (ii) policy-constraints. institutional constraints arc those imposed by external factors, that is, bank-required compensating balance. Policy constraints are imposed on cash management by the finn .ito;elf.For instance, the financial manager may he prohibited from selling securities before maturity. Either constraint can occur in the model during one monthly period or over several or :III the months in the one year planning horizon. An example of the linear programming model is this.

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