Question 10.9: Why do you think a business may decide to hold at least some...
Why do you think a business may decide to hold at least some of its assets in the form of cash? (Hint: There are broadly three reasons.)
The three reasons are:
1 To meet day-to-day commitments, a business requires a certain amount of cash. Pay-=ments for wages, overhead expenses, goods purchased and so on must be made at the due dates. Cash has been described as the lifeblood of a business. Unless cash circulates through the business, and is available for the payment of claims as they become due, the survival of the business will be at risk. Profitability is not enough; a business must have sufficient cash to pay its debts when they fall due.
2 If future cash flows are uncertain for any reason, it would be prudent to hold a balance of cash. For example, a major customer that owes a large sum to the business may be in financial difficulties. Given this situation, the business can retain its capacity to meet its obligations by holding a cash balance. Similarly, if there is some uncertainty con-cerning future outlays, a cash balance will be required.
3 A business may decide to hold cash to put itself in a position to exploit profitable oppor-tunities as and when they arise. For example, by holding cash, a business may be able to acquire a competitor’s business that suddenly becomes available at an attractive price.