What is Cash Management & Motives/Reasons To Hold Cash

May 17th, 2008 Comments off
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Cash Management:-

  • Is the maintaining of liquidity of a firm to minimize the risk of insolvency. ( An insolvent company is one where it is unable to meet its maturing liabilities on time because it has inadequate liquidity to meet its debt obligation)
  • Cash Management is also about the proper balancing of keeping cash without letting it idling around.
  • Remember that profit is not equating to cash flow. A highly profitable company might collapse if without adequate cash flow due to the tying up of company’s funds with the accounts receivable and worsen by the needs to make regular payments like wages, rent & utilities, taxes

Motives/Reasons of Holding Cash:

· Three(3) motives advocated by British economist, John Maynard Keynes namely for:

· Transaction motive

· Precautionary motive and

· Speculative motive

The Transaction motive:

  • Maintaining cash for the purpose of meeting cash needs arising in the ordinary course of doing business.
  • Includes regular payments like wages, utilities, acquisition of fixed assets and inventories
  • Note that the amount of cash needed for transaction requirements depends on the nature of business and varies from industry to industry.

The Precautionary motive:

  • Maintaining of cash balance as buffer for UNEXPECTED needs that may arise.
  • Either holding in cash or marketable securities that can be liquidated easily

The Speculative motive:

  • Holding cash for potential profit making situation like purchasing raw materials in bulk in anticipation of a fall in price

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