Baumol noted that cash balances are very similar to inventory levels and developed a model based on the economic order quantity.   

Where:
C₀＝transaction costs （brokerage, commission, etc）
D＝demand for cash over the period
C_H＝cost of holding cash

Transatin costs

Demard for cash over the period

Cost of holding cash

Drawbacks of the Baumol model
·In reality, it is unlikely to be possible to predict amounts required over future periods with much certainty.
·No buffer inventory of cash is allowed for. There may be costs associated with running out of cash.
·There may be other normal costs of holding cash which increase with the average amount held.

Miller Orr model controls irregular movements of cash by the setting of upper and lower control limits on cash balances.

Formula:

Upper limit= Lower limit + Spread
Return point = Lower limit + （1/3 x Spread）
Spread = 3[（3/4 x Transaction cost x Variance of cash flows）/Interest Rate]^1/3

Notes: Variance and interest rates should be expressed in daily terms.