Describe the motives of holding cash.

The motives for holding the cash balances are: The transaction motive The transaction motive refers to the holding of cash to meet routine cash requirements to finance the transaction which a firm carries on in the ordinary course of business. The need to hold cash is minimized, if it is possible to synchronize cash receipts and cash payment. But in the business world, it would be a miracle, if cash receipts coincided perfectly with cash disbursements. Therefore, the firms are required to maintain sufficient cash to meet its normal requirements. Normal cash requirements are those which are predictable and occur as a result of normal operations and include cash for such things as raw materials supplies, interest, wages and salaries, replacement of fixed assets which are worn out through use, dividends and taxes. Thus, the transaction motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronised with cash receipts. Precautionary Motive Precautionary motive of holding cash implies the need to hold cash to meet unpredictable obligations. The abnormal requirements, which cannot be anticipated in the normal routine of the business process, include, cash for such things as: Fixed assets replaced for reasons other than normal depreciation; Unexpected slow-down in collection of account receivables; Presentation of bills for settlement earlier than expected; Sharp increase in cost of raw materials; Floods, strikes and failure of important customers etc. The cash balances held in reserve for such random and unforeseen fluctuations in cash flows are called Precautionary balances. Precautionary cash balance provides a cushion to meet unforeseen contingencies. Speculative motive The speculative motive refers to the holding of cash for investing in profit making opportunities as and when they arise. While precautionary motive is defensive in nature, the speculative motive represents a positive and aggressive approach. The speculative motive helps to take advantage of: Making purchases of raw materials at a reduced price on payment of immediate cash; Delaying the purchase of raw materials in anticipation of decline in prices; and Speculation in the movements of prices of securities and rates of interest.