A Transshipment Model for Cash Management Decisions

The cash management problem is concerned with optimally financing net cash outflows and investing net inflows of a firm while simultaneously determining payment schedules for incurred liabilities. The problem is formulated as a transshipment model to minimize the total cost of allocating sources of funds to different uses while retaining the possibility of transferring cash between sources. A numerical example is formulated using this model and its optimal solution is shown to be essentially the same as that of a linear programming formulation proposed by Orgler. Extensions of the methodology for examining the effects of different “minimum cash balance” requirements and for incorporating other institutional constraints are also outlined. The transshipment formulation is useful in organizing data for financial control. It is intuitively appealing and computationally more efficient (by a factor of about 30 to 1) than the linear programming formulation of the problem.