A Game Theoretic Approach to Cash Management

Abstract

The cash management function is a general designation for two distinct corporate activities: cash flow acceleration and liquidity account allocation. The former problem concerns procedures for speeding cash collections from customers and slowing cash disbursements to suppliers so as to optimize the firm's use of cash. The latter problem, on the other hand, takes the firm's cash flow as given and determines the minimum cash balance, the excess to be held in the form of marketable securities. Although a well-developed literature exists for the liquidity account allocation problem (e.g., Baumol 1952; Tobin 1956; Miller and Orr 1966; Eppen and Fama 1968), analysis of the cash flow acceleration problem has been less extensive. Some papers examine techniques for speeding cash collections, such as lock box systems (e.g., Kraus, Janssen, and McAdams 1970) while others explore methods for slowing cash disbursements, such as remote disbursement systems (e.g., Gitman, Forrester, and Forrester 1976), but no one has investigated the interaction of the two. This is a serious deficiency, because, as a practical matter, firms simultaneously utilize both types of procedures, so that the cash management efforts of other firms tend to counteract each firm's own efforts. An inherently