MOTIVES FOR HOLDING CASH

MOTIVES FOR HOLDING CASH

The following are motives for holding cash:

1. Transaction Motive: This is money held by people to take care of day to day expenses or expenditure e.g money for transportation etc. transaction etc. transaction motive is influence by level of income, current price level, length of time between pay days, spending habit etc. the higher the income the more money is held for transactions.

2. Precautionary Motive: This motive for holding cash help for unforeseen/ emergencies such as ill health accident e.t.c. It is money kept for the rainy days.

It is influenced by one’s level of income, health condition environment e.t.c

3. Speculative Motive: This is money held for investment purpose as in purchases of bonds, securities good at period of low price for resale’s at period of high price e.g when bond price are very high and investor speculate a price fall in price.

Also if the future of an investment is bright, people will invest now with liquidity preference falling. Speculative is influence by prevailing investment condition, interest rate, inflation e.t.c.

4. Optimum Cash Level: Determining the amount of cash the corporation needs at a point in time is a difficult task.

The amount of cash required by corporation both in hand and at bank to a large extent depends on the volume of the business and to the industry.

5. Cash balances are required to overcome unusual and unexpected rush for cash if the corporation has little cash, it can be in liquidity difficulties to earn profit.

Maintaining a sound liquidity position of the corporation so that due may be settled in time is one of the primary responsibilities of the financial managers.

As cash constitutes a proportion of current asset the ratio of the cash balance to their level of current asset is a measure, which will assist in the management of cash.