Q. What are the Motives of Holding Cash?
Motives of Holding Cash: - In every business assets are kept for the reason that they generate profit. But cash is an asset which doesn't generate any profit itself yet in every business sufficient cash balance is maintained.
(1) Transaction Motive: - A number of transactions have effect in every business. A few transactions result in cash outflow such as payment for wages, purchases, operating expenses, financial charges like taxes, interest, dividends etc. Likewise some transactions result in cash inflow such as receipt from receipt, sales from investment and other incomes etc.
But the cash outflows as well as inflows do not perfectly match with each other. At times, inflows surpass outflows while at other times outflows exceed inflows. To meet the shortage of cash in circumstances when cash outflows exceed cash inflows the business must have an adequate cash balance.
(2) Precautionary Motive: - In each business some cash balance is kept as a preventative measure to meet any unexpected contingency. These contingencies may perhaps contingencies may include the following:
(i) Strikes, Floods and failure of important customers.
(ii) Unexpected sluggish down in collection from debtors.
(iii) Termination of orders by customers.
(3) Speculative Motive: - In business a few cash is kept in reserve to take advantage of profitable opportunities which may take place from time to time.
These opportunities are:
(i) Chance to purchase raw material at low prices on payment of immediate cash.
(ii) Chance to purchase other assets for the business when their prices are low.
(4) Compensative Motive: - Banks offers a number of services to the business such as supply of credit information about other customers, clearance of cheques and transfer of fund and so on. Bank charge commission or else fee for some of these services. For other services, banks do not charge any commission or fee they require indirect compensation. For this reason bank requires the client to maintain a minimum balance in their accounts in the bank. As a result cash is as well kept at the bank to compensate for free services by banks to the business.