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Transaction Motive

An important reason for maintaining cash balances is the transaction motive. This refers to the of cash to meet routine cash requirements to finance the transactions which a firm carries III the ordinary course of business. A firm enters into a variety of transactions to accomplish its ives which have to be paid for in the form of cash. For example, cash payments have to be for purchases, wages, operating expenses, financial charges like interest, taxes, dividends, so on. Similarly, there is a regular inflow of cash to the: firm from sales operations, returns on e investments, and so on. These receipts and payments constitute a continuous two-way • of cash. But the inflows (receipts), and outflows (disbursements) do not perfectly coincide or nise. At times, receipts exceed outflows while, at other times, payments exceed inflows. To ensure their the firm can meet its obligations when payments become due in a situation in which disbursements are in excess of the current receipts. it must have an adequate cash balance. The requirement of cash balances to meet routine cash needs is known as the traction motive and such motive refers to the holding of cash to meet anticipated obligations whose timing is nor perfectly synchronised with cash receipts. If the receipts of cash and its disbursements could exactly coincide in the normal course of operations. a firm would not need cash for transaction purposes. Although a major part of transaction balances are held in cash, a part may' also be in such marketable 'securities whose maturity conforms to the timing of the anticipated payments, such as payment of taxes. dividends, and so on.

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