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Stone Model of Cash Management

The Stone Model uses control limits similar to the Miller-Orr Model but also incorporates a short-term forecast of cash flows to determine if a surplus or deficit will naturally correct itself before taking action. If the upper limit is reached but cash outflows are forecasted to reduce the balance, no action is taken. But if the surplus is expected to remain, cash is withdrawn to a predetermined level. The opposite applies for the lower limit. The goals are to ensure adequate cash for payments, minimize costs of obtaining cash for deficiencies, and dispose of surplus cash. It assumes a basic cash flow pattern and leaves collection/disbursement to other methods.

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5K views4 pages

Stone Model of Cash Management

The Stone Model uses control limits similar to the Miller-Orr Model but also incorporates a short-term forecast of cash flows to determine if a surplus or deficit will naturally correct itself before taking action. If the upper limit is reached but cash outflows are forecasted to reduce the balance, no action is taken. But if the surplus is expected to remain, cash is withdrawn to a predetermined level. The opposite applies for the lower limit. The goals are to ensure adequate cash for payments, minimize costs of obtaining cash for deficiencies, and dispose of surplus cash. It assumes a basic cash flow pattern and leaves collection/disbursement to other methods.

Uploaded by

atul1157
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Stone Model

The Stone Model is somewhat similar to the Miller-Orr Model in so far as it uses control limits. However, it incorporates a look-ahead forecast of cash flows when an upper or lower limit is hit to take into account the possibility that the surplus or deficit of cash may naturally correct itself. If the upper control limit is reached, but is to be followed by cash outflow days that would bring the cash balance down to an acceptable level, then nothing is done. If instead the surplus cash would substantially remain that way, then cash is withdrawn to get the cash balance to a predetermined return point.

Of course, if cash were in short supply and the lower control limit was reached, the opposite would apply. In this way the Stone Model takes into consideration the cash flow forecast. The goals of this model are:- To ensure adequate amounts of cash on hand for bill payments,- To minimize transaction costs in acquiring cash when deficiencies exist,- And to dispose of cash when a surplus arises. This model assumes some cash flow pattern as a given, leaving the task of cash collection, concentration, and disbursement to other methods.

Application
It is possible to apply Stone Model when we generally do not know the future inflows and outflows of the firm but we can partially predict them for short time. We can also predict the general level of out flows, but for the time after the short time we have our little knowledge about inflows and outflows, we cannot predict which will be higher, inflows or outflows.

Stone Model

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