Cash is a current asset essential for the successful operation in the product cycle. Cash is the basic input needed to keep the business running on a continuous basis, it is also the ultimate output expected to the realized by selling the service or product manufactured by the firm. Cash is considered as to be the most significant and the least productive asset that a firm holds. Cash constitutes only a small portion of the total current asset ie; 1% to 3%. Yet managers’ considerable time is devoted in managing it. Cash is the money, which a firm can disperse immediately without any restrictions. It includes coins, currencies, cheques etc.
Cash management is concerned with the managing of:
• Cash in flows and out flows of the firm.
• Cash flows within the firm.
• Cash balances held by the firm at point of time by financing deficit or investing the surplus.
The management of cash is important because it is difficult to predict cash flows accurately, particularly the inflows and there is no perfect coincidence between the inflows and outflows of cash. In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments, the firm should develop appropriate strategies for cash management.
Motives for Holding Cash
1. Transaction Motive:
It requires a firm to hold cash to conduct in business in ordinary course. The firm needs cash primarily to make payments for purchases, wages, salaries, other operating expenses, taxes, dividends etc. The transaction motive mainly refers to holding cash to meet anticipated payments, whose timing is not perfectly matched without cash receipts.
2. Precautionary Motive:
The precautionary motive is the need to hold cash to meet contingencies in the future. It provides a cushion or buffer withstand some unexpected emergencies. It stronger the ability of the firm to borrow at short notices then the need for precautionary balance will be less. The amount of cash set-aside for precautionary reasons will be invested in high liquid and low risk marketable securities.
3. Speculative Motive:
It relates to the holding of cash for investing in profit making opportunities as and when they arise. The opportunity to make profit may arise when the security prices change. The firm will hold cash when it is expected that there will be a rise in price of commodities and securities. The firm will also purchase securities when it is expected that interest rates will rise and security prices will fall. Then the firm will be benefited by the subsequent rise in prices of securities.
4. Compensating Motive:
Business of today is predominantly depend on the commercial bank for financial support for some of services; the bank charges a commission or service charges but for some others it insist that a pre-determined minimum balance be kept with the bank, which should not be withdrawn in the ordinary course of business, for instance, if a bank guarantee is issued by the bank, guarantee charges based on the period and amount are debited by the bank. In addition it may ask for relation of some minimum balance too. Such balance is known as Compensating balance.
5. Expansion Motive:
It refers to the motive of accumulating cash to meet the requirements of expansion envisaged by the business. Holding of cash for such purposes been described as business expansion motive.