The transactional motive is the need to hold cash for the purpose of conducting everyday transactions. It ensures that a business has sufficient liquidity to meet its short-term financial obligations.
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Transactional motive is one of the three primary reasons companies hold cash, alongside precautionary and speculative motives.
It involves maintaining enough cash to cover operational expenses like payroll, utilities, and inventory purchases.
Efficient cash management under the transactional motive helps avoid unnecessary borrowing or overdraft fees.
The amount of cash held for transactional purposes can be influenced by factors such as payment terms with suppliers and the predictability of cash inflows from customers.
Businesses often use tools like cash flow forecasting to determine the optimal level of cash needed for transactional purposes.
Review Questions
What are the key components that influence the amount of cash held for transactional motives?
How does effective management of transactional cash impact a company's financial stability?
Name two other primary motives for holding cash apart from the transactional motive.
Related terms
Precautionary Motive: The need to hold cash as a buffer against unexpected financial needs or emergencies.
Speculative Motive: Holding cash to take advantage of potential investment opportunities or favorable market conditions.
Cash Flow Forecasting: A financial tool used to estimate future cash inflows and outflows, helping businesses manage their liquidity effectively.