6. Cash balances

The importance of managing cash in hand

Cash is considered an idle asset because it does not earn interest. Good financial management requires a firm to hold a limited amount of cash, but it is important for the firm to hold sufficient cash so that it can pay its current obligations, maintain its credit rating, and meet its unexpected cash needs.

The following statement refers to a type of cash balance. Select the best type of cash balance to complete the sentence:

A cash balance is held to allow firms to take advantage of any bargain purchases that might arise.

Consider the following case of Dallas Builders Inc.:

Imagine that Dallas Builders Inc. is a manufacturing company. Dallass financial managers have begun running a lot of the firms banking affairs through a larger bank. The new bank has more experience dealing with firms of Dallass stature. The new bank charges very low fees for its services but does require that Dallas keep a minimum balance in its account.

What type of cash balance is this?

Transactions

Speculative

Precautionary

Compensating