9.1 CASH PLANNING

9.1.1 Motives behind Holding Cash

Cash planning involves to a large extent ascertaining the cash requirement. However, before ascertaining the cash requirement, there arises the question as to why firms need to hold cash. The motives behind the holding of cash are as follows:

  1. Transaction motive
  2. Precautionary motive
  3. Speculative motive
  4. Motives of exploiting potential investment opportunities
  5. Compensating balance requirements

A firm needs cash for transaction purposes. This means that cash is needed to buy raw materials, to pay wages and salaries and to meet many other expenses. The satisfaction of these needs results in a continuous outflow from the cash balance. But, at the same time, sales leads to a cash inflow. Had the inflows ...

Get Fundamentals of Financial Management, Third Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.