Optimal Cash Balance


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Optimal cash balance is a model that attempts to establish the magical cash balance, with the aim of minimizing the costs, while maintaining enough business liquidity. This is done, so as to ensure that business bills are paid in a timely manner, and some cash is left, for the purpose of addressing emergencies. The optimal cash balance is established through a number of steps, including managing the balance of cash, as a way of evaluating liquidity. This is done through different ways including, current ratio calculation: this method involves dividing the total current assets amount by the total current liabilities amount held.[1]

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The optimal cash balance will help in working capital management, as it gives indicators on the balance between inventory, current assets and current liabilities – which gives indicators of the need to reduce inventory, to increase current assets, or the need to cut on current liabilities. From a personal point of view, optimal cash balance computation is a tool that should be used continually, as it helps establish the liquidity of a business, as well as the capital management competency of the administration.

Works Cited

Anthony, Robert, and Breitner, Leslie. Essentials of Accounting & Post-test Booklet 8, 8th ed.       New Jersey: Prentice Hall, 2003.

Rice, Anthony. Accounts Demystified: How to Understand Financial Accounting & Analysis, 4th ed. New Jersey: FT Prentice Hall, 2002.   


[1], Robert, Anthony and Breitner, Leslie, Essentials of Accounting & Post-test Booklet 8, 8th ed. (New Jersey: Prentice Hall, 2003) 37.

[2] Rice, Anthony, Accounts Demystified: How to Understand Financial Accounting & Analysis, 4th ed. (New Jersey: FT Prentice Hall, 2002) 54-55.  

[3], Robert, Anthony and Breitner, Leslie, Essentials of Accounting & Post-test Booklet 8, 8th ed. (New Jersey: Prentice Hall, 2003) 42.

[4] Rice, Anthony, Accounts Demystified: How to Understand Financial Accounting & Analysis, 4th ed. (New Jersey: FT Prentice Hall, 2002) 55

[5] Robert, Anthony and Breitner, Leslie, Essentials of Accounting & Post-test Booklet 8, 8th ed. (New Jersey: Prentice Hall, 2003) 93.

[6] Rice, Anthony, Accounts Demystified: How to Understand Financial Accounting & Analysis, 4th ed. (New Jersey: FT Prentice Hall, 2002) 87