Question No. 3 - MMPC-001 - Management Functions and Organisational Processes

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MMPC -001 - Management Functions and Organisational Processes

Question No. 3 - Discuss and describe different leadership styles and their relevance in the present scenario of organisations.  

A leader is a person who influences a group of people towards the achievement of a goal while leadership is the art of motivating a group of people to act towards achieving a common goal. Different leadership styles will result in different impact to organization. The leader has to choose the most effective approach of leadership style depending on situation because leadership style is crucial for a team success. By understanding these leadership styles and their impact, everyone can become a more flexible and better leader.

1. Transactional Leadership

Transactional leadership is a term used to classify a group of leadership theories that inquire the interactions between leaders and followers. This style of leadership starts with the premise that team members agree to obey their leader totally when they take a job on. The “transaction” is usually that the organization pays the team members, in return for their effort and compliance. As such, the leader has the right to “punish” team members if their work doesn’t meet the pre-determined standard. Team members can do little to improve their job satisfaction under transactional leadership. The leader could give team members some control of their income/reward by using incentives that encourage even higher standards or greater productivity. Alternatively a transactional leader could practice “management by exception”, whereby, rather than rewarding better work, he or she would take corrective action if the required standards were not met.

Transactional leadership is really just a way of managing rather a true leadership style, as the focus is on short-term tasks. It has serious limitations for knowledge-based or creative work, but remains a common style in many organizations.

2. Autocratic Leadership

Under the autocratic leadership styles, all decision-making powers are centralized in the leader as shown such leaders are dictators. Autocratic leadership is an extreme form of transactional leadership, where a leader exerts high levels of power over his or her employees or team members. People within the team are given few opportunities for making suggestions, even if these would be in the team’s or organization’s interest.

Autocratic leadership style  is often considered the classical approach. It is one in which the manager retains as much power and decision-making authority as possible. The manager does not consult employees, nor are they allowed to give any input. Employees are expected to obey orders without receiving any explanations. The motivation environment is produced by creating a structured set of rewards and punishments. Autocratic leaders make decisions without consulting their teams. This is considered appropriate when decisions genuinely need to be taken quickly, when there’s no need for input, and when team agreement isn’t necessary for a successful outcome.

Many people resent being treated like this. Because of this, autocratic leadership often leads to high levels of absenteeism and staff turnover. Also, the team’s output does not benefit from the creativity and experience of all team members, so many of the benefits of teamwork are lost.

For some routine and unskilled jobs, however, this style can remain effective, where the advantages of control outweigh the disadvantages.

3. Transformational Leadership

Transformational leadership is a leadership style that is defined as leadership that creates valuable and positive change in the followers. A transformational leader focuses on “transforming” others to help each other, to look out for each other, to be encouraging and harmonious, and to look out for the organization as a whole. In this leadership, the leader enhances the motivation, morale and performance of his follower group. A person with this leadership style is a true leader who inspires his or her team with a shared vision of the future. Transformational leaders are highly visible, and spend a lot of time communicating. They don’t necessarily lead from the front, as they tend to delegate responsibility amongst their teams. While their enthusiasm is often infectious, they can need to be supported by “detail people”.

In many organizations, both transactional and transformational leadership are needed. The transactional leaders (or managers) ensure that routine work is done reliably, while the transformational leaders look after initiatives that add new value.

4. Servant Leadership

This term, coined by Robert Greenleaf in the 1970s, describes a leader who is often not formally recognized as such. When someone, at any level within an organization, leads simply by virtue of meeting the needs of his or her team, he or she is described as a “servant leader”. Servant Leadership’s focus was on the leader as a servant, with his or her key role being in developing, enabling and supporting team members, helping them fully develop their potential and deliver their best. In many ways, servant leadership is a form of democratic leadership, as the whole team tends to be involved in decision-making.

Supporters of the servant leadership model suggest it is an important way ahead in a world where values are increasingly important, and in which servant leaders achieve power on the basis of their values and ideals. Others believe that in competitive leadership situations, people practicing servant leadership can find themselves “left behind” by leaders using other leadership styles. Followers may like the idea of servant leadership so there’s something immediately attractive about the idea of having a boss who’s a servant leader. People without responsibility for results may like it for its obviously democratic and consensual approach.

5. Charismatic Leadership

The Charismatic Leader and the Transformational Leader can have many similarities, in that the Transformational Leader may well be charismatic. Their main difference is in their basic focus. Whereas the Transformational Leader has a basic focus of transforming the organization and, quite possibly, their followers, the Charismatic Leader may not want to change anything. A charismatic leadership style can appear similar to a transformational leadership style, in that the leader injects huge doses of enthusiasm into his or her team, and is very energetic in driving others forward.

However, charismatic leaders can tend to believe more in themselves than in their teams. This can create a risk that a project, or even an entire organization, might collapse if the leader were to leave because in the eyes of their followers, success is tied up with the presence of the charismatic leader. As such, charismatic leadership carries great responsibility, and needs long-term commitment from the leader.

6. Democratic Leadership or Participative Leadership

Although a democratic leader will make the final decision, he or she invites other members of the team to contribute to the decision-making process. This not only increases job satisfaction by involving employees or team members in what’s going on, but it also helps to develop people’s skills. Employees and team members feel in control of their own destiny, and so are motivated to work hard by more than just a financial reward. Democratic leadership can produce high quantity work for long periods of time. Many employees like the trust they receive and respond with cooperation, team spirit, and high morale.

As participation takes time, this style can lead to things happening more slowly than an autocratic approach, but often the end result is better. It can be most suitable where team working is essential, and where quality is more important than speed to market or productivity.

7. Laissez-Faire Leadership

The laissez-faire leadership style is also known as the “hands-off ¨ style. It is one in which the manager provides little or no direction and gives employees as much freedom as possible. All authority or power is given to the employees and they must determine goals, make decisions, and resolve problems on their own.

This French phrase means “leave it be” and is used to describe a leader who leaves his or her colleagues to get on with their work. It can be effective if the leader monitors what is being achieved and communicates this back to his or her team regularly. Most often, laissez-faire leadership works for teams in which the individuals are very experienced and skilled self-starters. Unfortunately, it can also refer to situations where managers are not exerting sufficient control. The advantage of this kind of style is positive only in the case when the employees are very responsible and in case of creative jobs where a person is guided by his own aspirations. In these cases, less direction is required so this style can be good. This style has more disadvantages because usually it is the result of the lack of interest of the leader that leads to his adopting this style. It proves poor management and makes the employees lose their sense of direction and focus. The disinterest of the management and leadership causes the employees to become less interested in their job and their dissatisfaction increases.

8. Bureaucratic Leadership

This is style of leadership that emphasizes procedures and historical methods regardless of their usefulness in changing environments. Bureaucratic leaders attempt to solve problems by adding layers of control, and their power comes from controlling the flow of information. Bureaucratic leaders work “by the book”, ensuring that their staff follow procedures exactly. This is a very appropriate style for work involving serious safety risks such as working with machinery, with toxic substances, at heights or where large sums of money are involved such as cash-handling.

In other situations, the inflexibility and high levels of control exerted can demoralize staff, and can diminish the organization’s ability to react to changing external circumstances.

                                                The Importance of Leadership Style

A personality style acts as a lens that shapes how a person sees the world and how the world sees them. It plays a significant role in the job they have and the way they communicate. Having an awareness of your personality style can allow you to communicate better, assess others' needs, and forge productive relationships.

There are four types of leadership styles. Some leaders can encompass more than one type – and people can also have varying degrees of assertiveness and expressiveness within the styles as well. The four types of leadership styles are:

- Direct – Direct leaders have high assertiveness and low expressiveness. They lead by taking charge.

- Spirited – Spirited leaders have high assertiveness and high expressiveness. They lead by inspiring.

- Considerate – Considerate leaders have low assertiveness and high expressiveness. They lead by building group harmony.

- Systematic – Systematic leaders have low assertiveness and low expressiveness. They lead by planning carefully.

Personality Style and Leadership

A leader’s ability to first identify these differences and then quickly adapt to address individual needs can be the difference between leadership success and failure. How does personality style relate to effective leadership? Personality style is based on assertiveness and expressiveness. Assertiveness is the degree of effort someone makes to influence others. Expressiveness is the degree of effort people put forth when they reveal their emotions to others. When you combine assertiveness and expressiveness, four distinct and different personality styles emerge: Direct, Spirited, Considerate, and Systematic. Hundreds of studies have tried to identify the primary source of effective leadership. Successful and well-rounded leaders generally exhibit four areas of focus, and who better than U.S. presidents to represent successful leaders?

Envisioning the Future = Direct

Leaders possessing this strength influence others by taking risks, and demanding action. Thomas Jefferson was a Direct leader who possessed a high level of assertiveness and low expressiveness. These leaders like to cut to the chase and tell other people “how it is.” Direct leaders possess an exceptional degree of confidence and they are not afraid to take risks to get big results. They excel at envisioning the future and lead by taking action, seeking out promising opportunities, and directing their attention toward the finish line.

Engage Others = Spirited

Spirited leaders have a talent to inspire and motivate others. They engage the people around them, generate excitement, and rally the troops to achieve a common goal. Spirited leaders like Franklin Delano Roosevelt are extremely enthusiastic and have a great ability to persuade others to see their point of view.

Encourage Others = Considerate

Abraham Lincoln was a Considerate leader whose style resulted from a combination of low assertiveness and high expressiveness. He was highly regarded for adding the best and the brightest to his staff and pulling together a team uniquely suited for dealing with the Civil War crisis. Considerate Leaders engage others and they excel at being supportive, active listeners.

Execute Results = Systematic

Leaders with this strength are detail-oriented and use informed decision-making to bring about high levels of performance. Much like George Washington, they are deliberate, accurate, and focused. While they may appear to be controlling, this is only a result of their meticulous nature. Four effective presidents, yet four very different personality styles; how is this possible? Effective leaders know how to draw on their natural strengths—and they know how to flex their personality style to meet the needs of others. Leadership is critical to the success or failure of a business.

Assess & Improve Your Own Style

Knowing your leadership style can be a critical first step to improving your abilities. The HRDQ assessment, What's My Leadership Style, helps uncover the personality traits that define your leadership. Our leadership style assessment quickly and accurately identifies a preference for one of the four behavioral leadership styles. You never know when you’ll be called upon to lead, and our What's My Leadership Style can help you unlock your true leadership potential.

Question No. 2 MMPC-001 - Management Functions and Organisational Processes

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MMPC -001 - Management Functions and Organisational Processes

Question No. 2 - What is the concept of organising? Briefly discuss and describe different approaches to organising and analysing work.

Organizing is a managerial process that defines the role of each person in an organization to achieve objectives set by the management of the organization. Regarding establishing a rights-responsibility relationship among all and to provide harmonious group action to coordinate as an inbuilt device in the enterprise. It affects how relationships working between individuals and groups within an organization complete and coordinate their activities. Effective organizing depends on many important concepts like work expertise, delegation, duration of control, a chain of command, authority, and decentralization versus centralization. Many of these concepts are based on the principles developed by Henri Fayol. In order to understand the concept of an organization, it is necessary to define the following words.

- Organizing as a structure:

Organizing a structure refers to a hierarchical arrangement of the position of the members and the department. Of an organization, It reflects the relationship between rights and responsibilities among the members. It recognizes who is to command and what to believe? It is a mechanism to direct, coordinate and control activities. It is a static a concept that can not be changed easily and quickly.

- Organizing as a process:

Organizing in the form of a process means grouping the duties to identify and work. People, authorization, responsibility to build relationships and coordinate activities between members and departments It usually determines, organizes, groups and assigns its members the task. It is a dynamic activity that can be arranged and changed according to the needs of the company.

- Organizing as a function:

Organizing is an important task after planning. The manager of the company organizes or collects resources like manpower, money, material, machines, methods, etc., it is necessary to take action on the track.

- Organizing as a group of people:

An event is a group or association of some people created for certain economic interests or non-economic interests. This is guided by the policy or company, school, college, hospital, government rules, Office, club, etc.

Five Approaches to Organizational Design

Managers must make choices about how to group people together to perform their work. Five common approaches — functional, divisional, matrix, team, and networking—help managers determine departmental groupings (grouping of positions into departments). The five structures are basic organizational structures, which are then adapted to an organization's needs. All five approaches combine varying elements of mechanistic and organic structures. For example, the organizational design trend today incorporates a minimum of bureaucratic features and displays more features of the organic design with a decentralized authority structure, fewer rules and procedures, and so on.

1. Functional structure

The functional structure groups positions into work units based on similar activities, skills, expertise, and resources (see Figure 1 for a functional organizational chart). Production, marketing, finance, and human resources are common groupings within a functional structure.

As the simplest approach, a functional structure features well‐defined channels of communication and authority/responsibility relationships. Not only can this structure improve productivity by minimizing duplication of personnel and equipment, but it also makes employees comfortable and simplifies training as well.

But the functional structure has many downsides that may make it inappropriate for some organizations. Here are a few examples:

The functional structure can result in narrowed perspectives because of the separateness of different department work groups. Managers may have a hard time relating to marketing, for example, which is often in an entirely different grouping. As a result, anticipating or reacting to changing consumer needs may be difficult. In addition, reduced cooperation and communication may occur.

Decisions and communication are slow to take place because of the many layers of hierarchy. Authority is more centralized.

The functional structure gives managers experience in only one field—their own. Managers do not have the opportunity to see how all the firm's departments work together and understand their interrelationships and interdependence. In the long run, this specialization results in executives with narrow backgrounds and little training handling top management duties.

2. Divisional structure

Because managers in large companies may have difficulty keeping track of all their company's products and activities, specialized departments may develop. These departments are divided according to their organizational outputs. Examples include departments created to distinguish among production, customer service, and geographical categories. This grouping of departments is called divisional structure (see Figure 2). These departments allow managers to better focus their resources and results. Divisional structure also makes performance easier to monitor. As a result, this structure is flexible and responsive to change.

However, divisional structure does have its drawbacks. Because managers are so specialized, they may waste time duplicating each other's activities and resources. In addition, competition among divisions may develop due to limited resources.

3. Matrix structure

The matrix structure combines functional specialization with the focus of divisional structure. This structure uses permanent cross‐functional teams to integrate functional expertise with a divisional focus.

Employees in a matrix structure belong to at least two formal groups at the same time—a functional group and a product, program, or project team. They also report to two bosses—one within the functional group and the other within the team.

This structure not only increases employee motivation, but it also allows technical and general management training across functional areas as well. Potential advantages include

Better cooperation and problem solving.

Increased flexibility.

Better customer service.

Better performance accountability.

Improved strategic management.

Predictably, the matrix structure also has potential disadvantages. 

Here are a few of this structure's drawbacks:

The two‐boss system is susceptible to power struggles, as functional supervisors and team leaders vie with one another to exercise authority.

Members of the matrix may suffer task confusion when taking orders from more than one boss.

Teams may develop strong team loyalties that cause a loss of focus on larger organization goals.

Adding the team leaders, a crucial component, to a matrix structure can result in increased costs.

4. Team structure

Team structure organizes separate functions into a group based on one overall objective (see Figure 4). These cross‐functional teams are composed of members from different departments who work together as needed to solve problems and explore opportunities. The intent is to break down functional barriers among departments and create a more effective relationship for solving ongoing problems.

The team structure has many potential advantages, including the following:

Intradepartmental barriers break down.

Decision‐making and response times speed up.

Employees are motivated.

Levels of managers are eliminated.

Administrative costs are lowered.

The disadvantages include:

Conflicting loyalties among team members.

Time‐management issues.

Increased time spent in meetings.

Managers must be aware that how well team members work together often depends on the quality of interpersonal relations, group dynamics, and their team management abilities.

5. Network structure

The network structure relies on other organizations to perform critical functions on a contractual basis (see Figure 5). In other words, managers can contract out specific work to specialists.

This approach provides flexibility and reduces overhead because the size of staff and operations can be reduced. On the other hand, the network structure may result in unpredictability of supply and lack of control because managers are relying on contractual workers to perform important work.

Question No. 1 MMPC-001 - Management Functions and Organisational Processes

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MMPC -001 - Management Functions and Organisational Processes

Question No. 1 - Describe the characteristics of Management and it’s importance. Briefly discuss the challenges faced by Manager in the present day context. 

Management is an essential to life, in order to organize it we need to manage. In every turn of life, we need to manage. Be it business or household, ‘management’ plays an important function. In the business world, good management is the backbone of every organization. 

“Management is the art of getting things done through and with the people in formally organized groups.” – this means that management is the way to get things done by the employees of an organization where they function in an organized way.

Characteristics of Management

To know the true nature of any system we should check the characteristic features of the same. Similarly, to know the management system we need to analyze its characteristics. The characteristics of management are as follows – 

1. Universal: Every organization irrespective of their financial position requires management to manage their activities, thus it is universal in nature.
2. Goal Oriented: Management helps the organization achieve goals systematically and without any fuss. 
3. Continuous Process: Management is an ongoing process which is required in every facet of an organization to function good, be it production system, human resource, finance or marketing
4. Multi-dimensional: Management not only manages the workforce but also manages every sphere of the organization whether it is production, human resource. 
5. Group Activity: The groups in an organization work together also the members in different groups work in a system, they belong to different backgrounds, culture and they have different aspirations, to work evenly without any difference issue they need to adopt the management.
6. Dynamic Function: Business environments have different factors like social, political, legal, technological and economical, with these factors in force an organization is open to changes frequently, with management in their system they can apprehend the changes and work towards responding to it.
7. Intangible Force: Management cannot be touched or seen, its effect can only be experienced and the benefit can only be enjoyed.

Precisely, all the functions, activities and processes of the organization are intertwined to one another. So, it is the task of the management to bring them together in sync in such a way that they help in reaching the already set result.

Importance of Management

1. It helps in Achieving Group Goals - It arranges the factors of production, assembles and organizes the resources, integrates the resources in effective manner to achieve goals. It directs group efforts towards achievement of pre-determined goals. By defining objective of organization clearly there would be no wastage of time, money and effort. Management converts disorganized resources of men, machines, money etc. into useful enterprise. These resources are coordinated, directed and controlled in such a manner that enterprise work towards attainment of goals.
2. Optimum Utilization of Resources - Management utilizes all the physical & human resources productively. This leads to efficacy in management. Management provides maximum utilization of scarce resources by selecting its best possible alternate use in industry from out of various uses. It makes use of experts, professional and these services leads to use of their skills, knowledge, and proper utilization and avoids wastage. If employees and machines are producing its maximum there is no under employment of any resources.
3. Reduces Costs - It gets maximum results through minimum input by proper planning and by using minimum input & getting maximum output. Management uses physical, human and financial resources in such a manner which results in best combination. This helps in cost reduction.
4. Establishes Sound Organization - No overlapping of efforts (smooth and coordinated functions). To establish sound organizational structure is one of the objective of management which is in tune with objective of organization and for fulfillment of this, it establishes effective authority & responsibility relationship i.e. who is accountable to whom, who can give instructions to whom, who are superiors & who are subordinates. Management fills up various positions with right persons, having right skills, training and qualification. All jobs should be cleared to everyone.
5. Establishes Equilibrium - It enables the organization to survive in changing environment. It keeps in touch with the changing environment. With the change is external environment, the initial co-ordination of organization must be changed. So it adapts organization to changing demand of market / changing needs of societies. It is responsible for growth and survival of organization.
6. Essentials for Prosperity of Society - Efficient management leads to better economical production which helps in turn to increase the welfare of people. Good management makes a difficult task easier by avoiding wastage of scarce resource. It improves standard of living. It increases the profit which is beneficial to business and society will get maximum output at minimum cost by creating employment opportunities which generate income in hands. Organization comes with new products and researches beneficial for society.

Challenges faced by Managers in the present day

1. Communicating effectively with employees: As a manager, there can often be an element of distance from the rest of the team. This creates one of the biggest challenges for managers – bridging the distance with effective and timely communication skills. Good managers need to develop advanced listening and speaking skills as they play a huge role in the success of their team. ‘A lack of interdepartmental communications’ has been found to be one of the biggest causes of stress for UK employees in 2020. This means that when a manager isn’t communicating well with their team about business matters or individual progress, not only could it be damaging the manager-employee relationship, but it could also be greatly adding to employees’ work-related stress.
2. Confronting performance problems: Performance problems are always going to be a concern for any manager. But in today’s fierce business environment, if your teams aren’t performing to a high standard, a competitor could easily come in and take your customer’s business. You need to get to the root of any problems quickly. But be careful – managers have the tricky job of finding the balance of getting the results you need and not damaging any relationships with your team members in the process. If you put your ‘strict manager’ hat on too soon, you risk damaging the trust with other members of your team too.
3. Letting employees go: This will probably always be the hardest part of any manager’s job – and it’s something you never want to get too comfortable doing. Unfortunately, there’s no easy way around this one and it doesn’t become any easier, no matter how much experience you have.
4. Making the right hiring decisions: So many candidates out there might have the experience and skills that you might be looking for and they’re probably perfectly capable to do the job. But this doesn’t mean they’re a perfect match to join your team. A good manager is able to decipher between a good skills hire and a good cultural fit. Finding the right blend of both. If you make a wrong decision in the hiring process, it can quickly affect your team's morale and performance. You'll also have to deal with the other problems we've outlined here, so making the right decision in the first place is a must.
5. Managing conflicts within your team: In a dream world, your team works well together. They’re great collaborators, feel comfortable being creative together and get on socially. Unfortunately, this dream doesn’t always come true. And when a conflict arises between two colleagues, it can be felt throughout the team. When conflicts aren’t resolved, they can quickly affect productivity and morale – and even lead to top performers leaving the company. Managers are tasked with nipping any conflicts in the bud early, before they become bigger concerns.
6. Retaining star employees in a competitive environment: Today, skills are becoming more and more specialised, so if you have a talented employee, you’ll want to do your utmost to keep them. But if you’re not offering your employees what they’re worth, someone else will. A challenge as a manager today is ensuring that your talented staff are supported, learning new skills, have a clear path of progression and are happy in their role. A further challenge comes as remote working continues to rise, employees are no longer limited to roles by location – so you’ll have to work even harder to retain your star employees.

MMPC -001 - Management Functions and Organisational Processes - MBA and MBA (Banking & Finance)

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MMPC -001 - Management Functions and Organisational Processes

Question No. 1 -  Describe the characteristics of Management and it’s importance. Briefly discuss the challenges faced by Manager in the present day context.          CLICK HERE 

Question No. 2 - What is the concept of organising? Briefly discuss and describe different approaches to organising and analysing work.                             CLICK HERE 

Question No. 3 - Discuss and describe different leadership styles and their relevance in the present scenario of organisations.                        CLICK HERE 

Question No. 4 - Describe and discuss various channels of communication and their role in organisations. Discuss how to overcome barriers to effective communication with relevant examples.           

                                                                    CLICK HERE 

Question No. 5 - Discuss the concept of change in organisations and the reasons for resistance to change. Briefly discuss the strategies to overcome resistance to change.               CLICK HERE 

Question No. 5 - BCOE - 143 Fundamentals of Financial Management

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BCOE - 143 Fundamentals of Financial Management

Question No. 5

Explain Baumol’s Model and Miller and Orr’s Model of cash management. 

1. Baumol’s EOQ Model of Cash Management:

William J. Baumol (1952) suggested that cash may be managed in the same way as any other inventory and that the inventory model could reasonably reflect the cost – volume relationships as well as the cash flows. In this way, the economic order quantity (EOQ) model of inventory management could be applied to cash management. It provides a useful conceptual foundation for the cash management problem. 

In the model, the carrying cost of holding cash-namely the interest forgone on marketable securities is balanced against the fixed cost of transferring marketable securities to cash, or vice- versa. The Baumol model finds a correct balance by combining holding cost and transaction costs, so as to minimize the total cost of holding cash.

The optimum level of cash balance is found to be:

Where,

C = Optimum level of cash balance

A = Annual cash payments estimated

T = Cost per transaction of purchase or sale of marketable securities

I = Interest on marketable securities p.a. (i.e., carrying cost per rupee of cash)

According to the model, optimum cash level is that level of cash where the carrying costs and transaction costs are the minimum. The carrying costs refers to the cost of holding cash i.e. interest forgone on marketable securities. The transaction cost refers to the cost involved in getting the marketable securities converted into cash and vice versa.

Assumptions:

The Baumol’s model holds good if the following assumptions are fulfilled:

(a) The rate of cash usage is constant and known with certainty. The model has limited use in times of uncertainty and firms whose cash flows are discontinuous or bumpy.

(b) The surplus cash is invested into marketable securities and those securities are again disposed of to convert them again into cash. Such purchase and sale transactions involve certain costs like clerical, brokerage, registration and other costs. The cost to be incurred for each such transaction is assumed to be constant/fixed. In practice, it would be difficult to calculate the exact transaction cost.

(c) By holding cash balance, the firm is would incur the opportunity cost of interest forgone by not investing in marketable securities. Such holding cost per annum is assumed to be constant.

(d) The short-term marketable securities can be freely bought and sold. Existence of free market for marketable securities is a prerequisite of the Baumol model.

2. Miller-Orr Cash Management Model:

Miller and Orr model (1966) assumes that the cashflow of the firm is assumed to be stochastic, i.e. different amounts of cash payments are made on different points of time. It is assumed that the movements in cash balance occur randomly. Miller and Orr suggested a model with control limits, which sets control points for time and size of transfers between an Investment Account and Cash Account.

The model asserts that transfer money into or out of the account to return the balance to a predetermined ‘normal point whenever the actual balance went outside a lower or upper limit.

The lower limit would be set by management, and the upper limit and return points by way of formulae which assume that cash inflows and outflows are random, their dispersion usually being assumed to repeat a pattern exhibited in the past.

The model specifies the following two control limits:

h = Upper control limit, beyond the cash balance should not be carried.

0 = Lower control limit, sets the lower limit of cash balance, i.e. the firm should maintain cash resources atleast to the extent of lower limit.

z = Return point for cash balance

The Miller-Orr model, will work as follows:

(i) When cash balance touched the upper control limit (h), securities are bought to the extent of Rs. (h-z).

(ii) Then the new cash balance is z.

(iii) When cash balance touches lower control limit (o), marketable securities to the extent of Rs. (z-o) will be sold.

(iv) Then the new cash balance again return to point z.

Assumptions:

The basic assumptions of the model are:

(a) The major assumption with this model is that there is no underlying trend in cash balance over time.

(b) The optimal values of ‘h’ and ‘z’ depend not only on opportunity costs, but also on the degree of likely fluctuations in cash balances.

The model can be used in times of uncertainty and random cash flows. It is based on the principle that control limits can be set which when reached trigger off a transaction. The control limits are based on the day-to-day variability in cash flows and the fixed costs of buying and selling government securities.