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There are many reasons to retain cash balances and semi-cash (stock) and all reason or incentive to retain cash and semi-based on the following two questions criticism:
A. What are the Drahp appropriate liquidity should be kept?
(B) What is the appropriate distribution of liquidity between cash and securities?
Economic John Keynes has identified three major incentives to retain cash are:
* Incentive to speculate and I mean that the company needed to keep the cash in order to be able to take advantage of some opportunities to make profits may become available to the company without the Strait of planning, such as the possibility of compromising on some buying opportunities if they arise, or to buy shares of another company in order to control or own, or when the emergence of attractive interest rates, as well as in the case of international companies and unfavorable fluctuations in exchange rates.
* Incentive to emergency situations is the need to cash margin safety and mil reserve Mali Although there is a need for the presence of cash in the hands of the company for emergency situations, but the availability of money market instruments and with its liquidity and the ability to trade, such as certificates of deposit and treasury bills, which ease the importance of keeping cash in order to emergency situations.
* Incentive for operations where the company needs cash to fund resulting from the natural activity of the company operations (purchase, sale and production) and the payment obligations of the company, which occur as a result of these activities, such as the payment of salaries and wages, payment of commercial debt, pay taxes and dividends.
* In addition to the foregoing, the banks require companies to maintain a minimum level of cash balances in current accounts for services provided by banks to these companies and these are called cash Stocks compensatory, and benefit the banks of these stocks through lend-term long interest rates high this course represents type of compensation to the banks for services provided by without giving in return, such as credit information for potential customers of the company and the collection of checks received from the company's customers.
Some business require bulk cash for day to day operations especially for making payments to temporary work force and also for making regular cash purchases for raw materials. Cash holding is required on the basis of daily average requirements.
But cash holding is mandatory in Banks to meet the payments for withdrawals and also to make payment of time liabilities for deposits on the basis of which the credibility of a financial institution is vested on. The average requirements are budgeted and cash holding is done on the basis of that.
Companies do hold cash for :
1- Making taxes payment.
2- Payments of duties, charge, or any tax.
3- Payment of Petty Cash or small nature of expenses.
4- Emergency purchase like medicine or consumables in Healthcare
5- To avoid dishonouring the cheque if the bank have less balance.
But we need the insurance for safeguarding the cash
1- They have less money to pay the debts
2- They are in the habit of doing this.
3- To use somebody else's money.
4- To pay, the more urgent payments.
5- To overcome cash flow crises - in this case payments will delay more.
To face the petty cash expenses forced
To handle Short term, small and urgent payments.
Be exploited to face any crisis experienced by the company
I think we can answer it in sample answer , according to the GAAP ( General Accepted Accounting Principle's ) which all the companies all over the world apply ((( Cash Reserve )) الاحتياطى النقدى I mean for any needs whatever its any time day or night to the company needs.
Firms are in existence to create products or provide services because the providing of services and creating of products results in the need for cash inflows and outflows
As a precaution serves as an emergency fund for the firm.
To take the advantage of special opportunities that if acted upon quickly will favour the firm.
