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 in case some unforeseen circumstances were to develop that cause fluctuations in the firms cash flows.

Consider the following case of San Jose Fabricators Inc.:

Imagine that San Jose Fabricators Inc. is a manufacturing company. In the past, San Jose Enterprises has suffered from poor cash management. In particular, situations arose in which the firm did not have the necessary cash on hand to pay its suppliers, resulting in serious penalties for late payment. The firm was not in financial distress; it merely hadnt managed its cash flow properly to have the required funds on hand.

What type of cash balance should San Jose pay more attention to in order to avoid these problems?

Transactions

Speculative

Precautionary

Compensating