What are the primary motives for holding cash?
Introduction:
Cash is also recognized as most liquid and lesser productive assets of the company. When cash leftovers idle, makes nothing but comprises cost in terms of interest payable to finance it.
Though cash is considered as a least fruitful current assets the corporation might hold certain amount of cash for marketable securities. Primarily there are 3 motives for holding cash.
Transaction Motive:
Cash balance is essential to encounter the daily dealings of business. Companies hold cash for creating essential payments for goods and services obtained by them. The cash arrivals and discharges of everyday processes of a company are not effortlessly coordinated, and thus liquid asset balances are essential to help a buffer among these flows, to encounter the variations in cashflows.
Precautionary Motive:
Companies hold cash to encounter uncertainties, emergencies, consecutively out of cash and variations in cash balances. The holding of cash on these motives are on protection. The upcoming cashflows and the capability to borrow extra funds at short notice are frequently uncertain. Occasionally, uncertainty can affect in continuation or disturbance of operating cycle. This needs to carry extra cash balances as a protective motive.
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