Publish On: 2019-05-18


Total Post: 559

Question: Define precautionary motive in cash management.

Reply On: 2013-06-22


Total Post: 8

ANS: Define precautionary motive in cash management.

The precautionary motive is the need to hold cash to meet contingencies in the future. It provides a cushion or buffer to withstand some unexpected emergency. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows can be predicted with accuracy, less cash will be maintained for an emergency. The amount of precautionary cash is also influenced by the firm’s ability to borrow at short notice when the need arises. Stronger the ability of the firm to borrow at short notice, less the need for precautionary balance.

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