The Analysis And Improvement Of Optimal Corporate Cash Holdings

Cash holdings is a important theoretical and practical issue in modern enterprise financial management activities which are not only in the company's daily transactions and business activities, but also closely linked to corporate governance. Usually, there are three definitions of cash. In this paper, the definition in financial management field is adopted as the starting point for research. Cash is a form of enterprise cash flow and more important than other capital forms through the movement of capital and the analysis of cash flow cycle graph. Therefore, corporate cash holdings of is an important aspect of financial management.A certain amount of cash in enterprises is mainly used to meet the transaction needs, speculation needs and prevention needs, so there will be holding cost, conversion cost and short-term cost. Based on the three costs, cost model and inventory model are figured out. In addition, cash flow model and factor analysis model are also analyzed and studied. This paper depicts these models'shortcomings and proposed amendments by analyzing their assumptions and preconditions on which they depend. Cost model and inventory model determine the optimal cash holdings only based on some but not all relevant costs of cash holdings. Furthermore the cost model ignores the cost of management and the conversion cost during cash shortage. Cost model also assumes that the cash expenditures is uniform, the cash needs of a certain time can be predicted, the shortage of cash can be solved by stock conversion in time and there is no other sources of cash. However, the assumption rarely occurs in the normal operation of enterprises. Cash in cash flow model is just for daily needs and the total demand for annuities is difficult to determine. In factor analysis model, direct proportion relationship between cash holding and sales income is difficult to determine.According to the above analysis, these models are modified properly. Firstly, cost analysis model is done from three aspects: lack of cash, just enough cash and adequate cash over business needs. Secondly, the rate of conversion costs is added into inventory model as prerequisite which leads to the conclusion that best cash holdings fluctuate within a certain range is reasonable. At last, average cash holdings is obtained by defining the maximum and minimum of cash holdings in cash flow model.In addition, a new model of optimal cash holdings is established from three aspects. The first: according to the cost analysis model, by using flexible budgeting principle and the innovation of random model; the second: with the adaptation of our native enterprises; the third, by the analysis of cash income and expenditure flow.Finally, based on the analysis of domestic and foreign literature, five measures are given mainly from the internal control system, managers and the relationship between the bank and presented, to make enterprises maintain optimal cash holdings.