SMART PLANET

In Cash management the term “Cash” is used in two senses. In a narrow sense it includes coins, currency notes, cheques, bank drafts, held by it in banks. In a broader sense it includes “near – cash assets” such as marketable securities time deposit with banks.

Motives for Holding Cash

In spite of the fact that cash does not earn substantial returns for the business but still a firm holds cash with the following motives:

1)      Transaction Motive:

Transaction motive refers to holding of cash to meet routine cash requirement to finance the transaction which a firm carries on in its ordinary course of business. For E.g. Cash payments to be made for purchase of materials, payments of wages, operating expenses, etc.

2)      Precautionary Motive:

A Firm has to hold cash for purposes which cannot be anticipated or predicted. E.g., floods, strikes, for settlement of prior to the due dates, increase in cost of raw material collection of accounts receivables, etc

3)      Speculative Motive:

In order to take advantage of opportunities’ which present themselves at unexpected moments and which are outside the scope of normal course of business. E.g., making purchases at favorable prices, an opportunity purchase raw material at reduced prices on payment of immediate cash, to speculate on interest rate movement, etc.

4)      Compensating Motive:

Banks provide a variety of services to business firms, such as clearance of cheques, supply of credit information, transfer of funds etc. In case of some of these services banks charge a commission or a fee while for others they seek indirect compensation. Business firms a required to maintain a minimum balance of cash at the bank in order to compensate themselves for the services rendered to the business firms. Such balances are called compensating balances.