The Motives for Holding Cash is simple, the cash inflows and outflows are not well synchronized, i.e. sometimes the cash inflows are more than the cash outflows while at other times the cash outflows could be more. Hence, the cash is held by the firms to meet the certain as well as uncertain situations.

Cash holdings are funds that companies set aside for use in emergency situations. The cash that is saved is used to cover costs or expenses that are unplanned or unexpected. In most cases, the reserves are specifically for short-term needs. One benefit of maintaining such a reserve is that the company can avoid credit card debt or the need to take on additional loan debt.

Its important for a business to review its financial statements to help determine how much should be placed as cash holding. Focusing on business expenses and earnings, as well as the companys cash flow statement, is the standard way to determine how large a reserve should be. In most cases, its best to use the previous years cash flow statement to identify how much revenue the company earned and how much money it spent.

Many times it gets difficult for businesses to raise cash from various sources, holding cash reserves makes ease of rising cash and availability of cash from internal sources.

This helps the business to grab the opportunities. Ingeneral businesses used to invest all the money and they had no money to grab new opportunities ahead. This helps increasing in growth opportunities.

Asymmetric information, also known as "information failure," occurs when one party to an economic transaction possesses greater material knowledge than the other party. This typically manifests when the seller of a good or service possesses greater knowledge than the buyer; however, the reverse dynamic is also possible. Almost all economic transactions involve information asymmetries. Thus business can take advantage of asymmetric information.

Distress cost refers to the expense that a firm in financial distress faces beyond the cost of doing business, such as a higher cost of capital. Companies in distress tend to have a harder time meeting their financial obligations, which translates to a higher probability of default. Distress costs may extend to the need to sell assets quickly and at a loss to cover immediate needs. Thus cash holdings helps in the condition of financial distress costs.