Holding Cash Case Study

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Chapter 5: MANAGEMENT OF CASH AND AN OVERVIEW OF ADANI’S PRACTICES 5.1 Motives for holding cash There are three motives for which a company holds cash: 1. Transactions Motive – A company is required to hold cash to conduct its business in the ordinary course. It needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payments, i.e. enough cash is received when the payment has to be made. However cash receipts and payments are not perfectly synchronized. On the basis of the analysis of the financial statements of Adani Enterprises, it can be said that it maintains sufficient cash balance to be able to make the required payments for periods when cash payments exceed cash receipts. 2. Precautionary Motive – It is the need for a company to hold cash so as to meet contingencies in the future. It provides a cushion to withstand some unexpected emergency. The amount of cash to be held for precautionary purpose depends upon the predictability of cash flows. If cash flows can be predicted with accuracy, less cash will have to be maintained for an emergency. The amount of precautionary cash is also influenced by the ability of the company to borrow at short notice when …show more content…

The appropriate amount of cash balance to be maintained should be determined on the basis of past experience and future expectations. In case the company maintains less cash balance, its liquidity position will be weak. On the other hand, if it maintains a higher cash balance then an opportunity to earn will be lost. Thus a company should maintain an optimum cash balance which is neither too small nor too large. To ensure this, the company should match the transaction costs and risk of too small a balance with the opportunity costs of too large a

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