ACCA Financial Management (F9) Certification Practice Exam

What does the Miller-Orr model primarily address in cash management?

1. A conservative cash balance strategy

2. A realistic cash management approach

3. A method for increasing profits

4. An inventory management technique

The correct answer is: A realistic cash management approach

The Miller-Orr model primarily addresses a realistic cash management approach, which takes into account the variability of cash flows within a business. This model provides a framework for managing cash balances by allowing companies to maintain a target cash level while also recognizing that cash inflows and outflows can fluctuate. It helps businesses determine optimal cash reserves while minimizing the costs associated with holding excess cash or needing to borrow funds due to cash shortfalls. The model suggests maintaining a target cash balance and allows for a range (the upper and lower limits) within which the actual cash balance can vary. When the cash balance approaches the upper limit, excess cash can be invested; when it drops near the lower limit, short-term borrowing may be necessary to cover any needs. This dynamic approach to cash management is crucial for organizations that face inconsistent cash flows, making it an effective tool rather than a simplistic static cash balance strategy. In contrast, options that refer to a conservative cash balance strategy or methods focused solely on profit maximization or inventory management do not adequately encapsulate the comprehensive and adaptable nature of the Miller-Orr model.