As a business owner we know every little bit can help your cash flow, so why not try a money market demand account that earns monthly interest? Contact your local branch for more details today!

How To Calculate The Demand Real Balance Money Demand Equation
How To Calculate The Demand Real Balance Money Demand Curve
How To Calculate The Demand Real Balance Money Demand Model
How To Calculate The Demand Real Balance Money Demand Graph

The weekly demand for cheap garments went down from 4,000 pieces to 2,500 pieces as the level of real income in the economy increased from $75 per day to $125 per day. The reason is the shift in preference due to the availability of extra money on the back of increased income level.

Of this approach to money demand by demonstrating that, in the presence of a riskless interest-bearing asset, desired money balances will depend only on the value of transactions and the spread.
Where Md/P is the demand for real money balances, r is the rate of interest, Y is real income and represents total spending, and the Greek letter γ (gamma) is the transactions cost of swapping money and savings balances (bonds). The negative sign under r means that an increase in r lowers the demand for real money balances.
Money demand appears to be time varying which also depends on household's real balance effects. 7 Lawrence Ball suggests that the use of adapted aggregates, such as near monies, can produce a more stable demand function.

Commercial Money Market Demand Account

Required opening balance	$1,000.00
Monthly minimum balance	$1,000.00
Activity Fees	$10.00 service charge per month if balance falls below minimum at any time during the statement cycle
Interest Bearing	Interest paid monthly*
Special Features	Number of checks limited per month Monthly statements with images

*Interest is accrued daily on collected balances at current market rates (subject to change) and paid monthly. At our discretion, we may change the interest rate and annual percentage yield on your account at any time. Interest begins to accrue on the business day you deposit cash or non-cash items. We use the daily balance method to calculate the interest on your account. This method applies a daily periodic rate to the principal in the account each day. If you close your account, the accrued interest will be paid.

Safety stock is the amount of inventory a business needs to have to achieve a certain level of risk mitigation when it comes to stockouts. There are typically two types of inventory: core and seasonal. Core inventory is inventory that remains in-stock all year round. Seasonal inventory consists of products you bring in for a specific period of time.

Safety stock is also called:

Buffer inventory/stock
Safety stock inventory/stock
Buffer inventory/stock
“Just in case” inventory/stock

The reorder point is calculated using the safety stock metric. It tells a business at what point it is time to place a new order to restock inventory, along with the minimum order and display quantities. This metric accounts for lead time, helping businesses to avoid costly stockouts. We’ll dive into that more later.

The importance of safety stock and reorder point

Stockouts are a costly problem for retail businesses. According to a study conducted by IHL Group, retailers are missing out on $1 trillion in sales every year because of it. Two metrics to consider which help mitigate the risk of stockouts are safety stock and reorder point.

Out-of-stocks happen because of many reasons, including:

Improper, ineffective or inaccurate inventory and operations management practices
Spikes in customer demand
Poor demand forecasting and inventory accounting
Disruptions in production process
Changes in lead time from suppliers

And when stockouts happen, retailers aren’t only missing out on sales. They’re also creating a poor customer experience, and possibly pushing potential lifelong customers to competitors.

Safety stock and reorder point help businesses face these challenges head-on, and maintain a consistent customer experience while also capturing sales — and minimal wasted warehouse space.

Safety stock provides a buffer of inventory for you to dip into when the above circumstances occur, while reorder point provides a buffer of time for you to restock on merchandise. This means fewer rush fees owed to suppliers, less operational chaos, and a more efficient use of warehouse space.

Let’s look at how to calculate these metrics:

How to calculate safety stock

There are two ways to calculate safety stock: one with standard deviation, and one without. First, we’ll look at the more simplified version.

Using the basic safety stock formula

The basic safety stock formula is:

How To Calculate The Demand Real Balance Money Demand Equation

Safety stock = (max daily sales * max lead time in days) – (average daily sales * average lead time in days)

Now, let’s define the variables:

Daily sales: total $ in sales per day

Lead time: amount of time it takes from placing an order to receiving product from supplier

Therefore, the maximum is the highest daily sales and/or longest lead time for that time period, while the average is exactly that.

Here’s an example to illustrate the basic safety stock calculation:

How To Calculate The Demand Real Balance Money Demand Curve

Your brand is known for the jeggings on your ecommerce site, even though you sell an array of apparel and accessories. You sell 125 pairs of jeggings every day, on average. Your best day was 300 jeggings units sold.

Because of the renowned jeggings, that’s something you want to make sure you ALWAYS have in stock — but never too much so that you have extra inventory of previous seasons’ styles.

From the time you place an order with your jeggings supplier, it takes 15 days for the product to arrive in your warehouse, on average. There have been times where this has been as quickly as 5 days, and others (like pre-holiday) where it’s taken as long as 30 days.

To get your safety stock, you’d do the following:

Safety stock = (300 * 30) – (125 * 15) = 9000 – 1875 = 7125

Your ideal level of safety stock is 7,125 pairs of jeggings.

Using standard deviation to calculate safety stock

The safety stock formula with standard deviation is more complicated but also more accurate. It accounts for variations in metrics. The formula goes like this:

Safety stock = desired service level * standard deviation of lead time * demand average

Here’s what each of those variables mean:

Desired service level: A business’s targeted probability that the inventory on hand is enough to meet actual customer demand. To get this number, you’d balance inventory costs against the cost of a stockout.

Standard deviation of lead time: Recall that lead time is how long it takes from placing an order to receiving product from a supplier. While suppliers may quote a lead time, in reality, this number fluctuates. The