Motives for holding cash, Managerial Accounting

The firm's require holding cash may be attributed to the three motives specified below:

  • The transaction motive
  • The precautionary motive
  • The speculative motive.

Transaction Motive: The transaction motive needs a firm to hold cash to held its business in the ordinary course and give or pay for operating activities as wages, salaries and purchases, and the other operating expenses, payments for utilities, dividends and taxes etc. The fundamental reason for holding cash is non-synchronization between cash outflows and cash inflows. Firms generally do not hold large amounts of cash; conversely the cash is invested in market securities that maturity consequent with several anticipated payments. Transaction motive mostly refers to holding cash to meet anticipated payments that timing is not perfectly matched along with cash inflows.

Precautionary Motive: The precautionary motive is the requirement to hold cash to meet emergencies and doubts. The quantum of cash held for precautionary goal is influenced by the degree of predictability of cash flows. Under case cash flows can be exactly estimated the cash held for precautionary motive would be quite low. The other factor that influences the quantum of cash to be kept for this motive is the firm's capability to borrow at short notice. Precautionary balances are generally maintained in the form of cash and marketable securities. The cash maintained for precautionary motive doesn't earn any return, thus, the firms must invest this cash in highly liquid and low risk marketable securities so as to earn several returns.

Speculative Motive: The speculative motive considers to holding of cash for investing in profit making opportunities as and while they occur. These types of opportunities are generally prevalent in businesses where sensitive to changes and the prices are volatile in the supply and demand conditions.

Posted Date: 4/9/2013 3:33:00 AM | Location : United States

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