What is your motive of holding cash ?
There are three suggested reasons for individuals and companies to hold cash – transaction, speculative and precautionary.
Transactions motive
To meet payments such as purchases, wages, taxes and dividends, arising in the ordinary course of business.
Speculative motive
To take advantage of temporary opportunities such as a sudden decline in the price of a raw material or sudden window of opportunity for buying an asset or making an investment.
Precautionary motive
To maintain a safety cushion or buffer to meet unexpected cash needs. The more predictable the inflows and outflows of cash for a person / company the less cash that needs to be held for precautionary needs.
Cash management involves the efficient collection disbursement and temporary investment of cash. The treasurer’s department of a company is responsible for the company’s cash management system. A cash budget tell us how much cash we are likely to have, when we are likely to have it and for how long. Thus it serves as the foundation for cash forecasting.
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