## Cash Management

### Meaning

Cash management is concerned with managing cash inflows, outflows, and balances to:

### Three Objectives

1. Provide adequate cash to all units of the organization

2. Avoid idle/unproductive surplus funds

3. Invest surplus cash to maximize returns

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## Why Firms Hold Cash — Keynes' Three Motives

Lord Keynes (British Economist) identified three reasons for holding cash:

Motive	Explanation	Example
Transaction Need	Meet day-to-day expenses and debt payments; normally covered by operating inflows; reserve maintained for temporary gaps	Paying wages, utility bills, supplier invoices
Speculative Need	Exploit profitable opportunities that arise unexpectedly and require immediate cash	Buying raw materials when prices crash temporarily
Precautionary Need	Safety buffer against unexpected adverse events	Emergency repairs, sudden market downturns

> Memory Aid: T-S-P → Transaction, Speculative, Precautionary

### The Core Challenge

The goal is to find and maintain an optimum cash level based on the predictability of cash flows.

Worked example

### Example 1

Scenario: XYZ Ltd holds ₹10 lakh extra cash beyond its weekly payroll needs. Classify each holding:

₹3 lakh kept for routine vendor payments → Transaction motive
₹4 lakh kept because commodity prices may fall soon → Speculative motive
₹3 lakh kept because the monsoon season is unpredictable → Precautionary motive

All three are legitimate motives, but the finance manager must regularly reassess whether the total holding is optimal.

⚠️ Common exam mistakes

Attributing Keynes' motives only to individuals/households — firms also hold cash for all three motives
Confusing speculative motive (capturing unexpected profit opportunities) with precautionary motive (guarding against unexpected losses)
Omitting the motive framework entirely when asked about 'why firms need cash' — Keynes' framework is the standard answer

Reference:

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Cash Management - Meaning, Objectives, and Keynes' Three Motives

Worked example