College Papers

Cash be the motives for cash holding from

Cash and cash equivalents are the most liquid form of current assets. The main purpose of cash is “to keep the company going” (Preve & Allende, 2010). “Cash equivalents arise when companies place their cash in a very short-term interest-earning financial instruments that are deemed to be highly secure and will convert back into cash within 90 days” (Skousen & Walther, 2009, p. 40). Cash and cash equivalents are known as financial working capital and financial working capital is not a part of operational working capital (Talonpoika et al, 2016). Horne and Wachowicz (2008) described cash holding motives for firms that are based on the concepts of an English economist Keynes (1936). The main difference between these concepts is that Keynes rather focused on cash holding motives for individuals (Horne & Wachowicz, 2008). According to Horne and Wachowicz (2008), following could be the motives for cash holding from a firm’s perspective: • transaction motive: the primary purpose of cash holding is to run the business and make up for business transactions and expenses like interest, tax and wages payments etc.• precautionary motive: cash is held as a safety measure against unusual contingent incidents. It also provides a room to cover the cash flow variations (Hill, 2013).• speculative motive: cash holdings enables the firms to capture ephemeral occassions that bring financial benefits to the firms, for instance reduced raw material prices (Horne & Wachowicz, 2008).Cash requirements are not presumed to be the same for different firms. Firms, that experience great variations in their cash flows are assumed to have large cash balances (Preve & Allende, 2010). Cash holdings can either be increased by reduction in dividend payments or issuance of new stocks (Myers & Majluf, 1984). Excessive cash reserves benefit the firm in several ways. Increased cash generated by free cashflows can either be distributed among shareholders as dividend or it can be utilised to repurchase outstanding stock of the company (Jensen, 1986). Managements can also invest this cash on mergers and acquisitions. The benefits associated with acquisitions are more likely to be better off if debt or cash holdings are used to finance acquisitions (Jensen, 1986). The operating performance of companies also get affected by the volume of cash holdings. A study has been conducted by Mikkelson and Partch (2003) to analyse the relationship between large cash holdings firms and their operational performance. The study postulates that firms who posses huge cash reserves have better operating performance as compared to their peers, who do not have ample cash balances, within the same industry and having the same size. They also experience fast growth and great variations in ‘maket-to-book value’ ratios of assets. Furthermore, companies having high reserves of cash tend to make massive investments to sustain their position in the market (Mikkelson & Partch, 2003).  According to scholarly researchers (Jensen, 1986; Blanchard, Silanes & Shleifer 1994), large cash holdings are not always in the best interest of a company. Excessive reserves of cash can be a reason of conflict between management and shareholders as shareholders can demand high dividends while management could be interested in using those funds for investment purpose (Jensen, 1986). Excessive cash balances also posses disadvantage of invested in unsubstantial return generating projects (Jensen, 1986). A study conducted by Blanchard, Silanes and Shleifer (1994) on the uses of cash windfalls postulates that managers tend to retain the excessive cash reserves with in the firm. They do not want to lose their control over the resources by utilizing it for debt reduction, dividend payments or supporting the stock buying back programs. The cash reserves are either used to terminate low-return generating projects inside the firm or invested in mergers and acquisitions without considering the underlying relevance to business (Blanchard, Silanes & Shleifer 1994). However, the perception of misuse of cash is contradicted by above mentioned study conducted by Mikkelson and Partch (2003) on firms of massive cash holdings. The study did not find any evidence of cash invested in projects or acquisition which yield low returns.2.3.2 Accounts Receivable Customers are normally required to pay upfront for the purchases or services but provision of goods or s