Optimal allocation of payments and receipts

Abstract

The standard cash management problem is based on incoming and outgoing cash flows of which the characteristics are given. In this paper the situation is studied in which the agent can manipulate the cash flows to a certain extent, i.e. the allocation of the flows within the year can—within limits—be chosen freely. In our set-up the agent, maximizing a utility function, approximates as closely as possible certain target values for the balance of incoming and outgoing flows of money by a proper reallocation of relevant receipts and outlays over the year. Using Wolfe's algorithm for quadratic programming problems, an application of our model is given to the finance balance of the Dutch central government. For three years a rather stable optimal allocation for six items arises.