Cash Management and Marketable Securities^197
interest requirements on debt, (3) repay the principal borrowed from creditors, (4) buy
the firmís own shares in the financial markets for use in executive compensation plans
or as an alternative to paying a cash dividend, and (5) pay tax. Again, by an ìirregular
basisî we mean items not occurring on a daily or highly frequent schedule. Second, the
companyís capital expenditure program will designate that fixed assets be acquired at
various intervals. Third, inventories will be purchased on a rather regular basis to ensure
a steady flow of finished goods off the production line. Note that the investment in fixed
assets with the inventory account does involve depreciation. This indicates that a portion
of the cost of fixed assets in charged against the product coming of the assembly fine.
This cost is subsequently recovered through the sale finished goods inventory, as the
product selling price will be set by management to cover all of the costs of production,
including depreciation.
The variety of influences we have mentioned that constantly affect the cash balance
held by the firm can be synthesized in terms of the classic motives for holding cash, as
identified in the literature of economic theory.
Motives for Holding Cash
In a classic economic treatise John Maynard Keynes segmented the firmís or any
economic units demand for cash into three categories: (1) the transactions motive, (2)
the precautionary motive, and (3) the speculative motive.
Transactions Motive
Balances held for transactions purposes allow the firm to dispense with cash needs that
arise in the ordinary course of doing business. Transactions balances would be used to
meet the irregular outflows as well as the planned acquisition of fixed assets and
inventories.
The relative amount of transactions cash held with be significantly affected by the
industry in which the firm operates. If revenues can be forecast to fall within a tight
range of outcomes, then the ratio of cash and near cash to total assets will be less for
the firm than if the prospective cash in flows might be expected to very over a wide
range. In this regard, it is well known that utility concerns can forecast cash receipts
quite accurately, owing demand for their services arising from their quasi-monopoly
status. This enables them to stagger their billings throughout the month and to time to
coincide with their planned expenditures. Inflows and outflows of cash are thereby
synchronised. Thus, we would expect the cash holdings of utility firms relative to sales
or assets to be less than those associated with a major retail chain that sells groceries.
The concern experiences a large number of transactions each day, almost all of which
involve an exchange of cash.