The more predictable the cash flows, the less precautionary balances that are needed and vice-versa. Precautionary balances are the cash balances which are held as reserve for random and unforeseen fluctuations in cash flows, i.e., this motive implies the need to hold cash to meet unpredictable obligations. (e) Increase in the cost of material, labour etc. (d) Cancellation of some order for goods due to inferior quality and (c) Unexpected delay in collection of trade dues (b) Bills which may be presented for settlement earlier than expected (a) Uncontrollable circumstances, such as, floods, strikes, droughts etc.
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The unexpected cash needs at short notice may be the result of This motive for holding cash has to do with maintaining a cushion or buffer to meet unexpected contingencies.
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Although, a major part of transactions balances is held in cash, a part may also be held in the form of marketable securities whose maturity conforms to the timing of the anticipated payments, such as payment of taxes, dividends etc.
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So, it refers to the holding of cash to meet anticipated obligations when timing is not perfectly synchronized with the inflows of cash. Therefore, in order to meet the day-to-day transactions, the requirement of cash is known as transaction motive. Thus, the receipts and payments constitute a continuous two-way flow of cash Since the inflows and outflows of cash do not perfectly synchronize, an adequate or a minimum cash balance is required to uphold the operations if outflows exceed the inflows.