Question

Using the table below, identify the cash management motives companies have for holding cash by placing an “X” in the box opposite the description.

	Compensating Balance	Precautionary Balance	Speculative Balance	Transactions Balance
Enables firm to take advantage of bargain purchases
Protects firm from unforeseeen fluctuations in cash flow
Balance maintained to offset cost of bank services
Required to make payment for day-to-day operations and expenses

Answer 1

Compensating Balance is the minimum balance that must be maintained with a bank to provide for cost of banking services.

a) Balance maintained to offset the cost of Banking services =  Compensating Balance

Precautionary Balance is the cash reserve maintained for any emergency or unexpected outflow of funds.

b) Protects firm from unforeseen fluctuations in cash flows = Precautionary Balance

Speculative Balance is the balance of cash held to take advantage of any unpredictable Bargain.

c) Enable a firm to take advantage of bargain purchases = Speculative Balance

Transactions Balance is the cash balance maintained to cover day-to-day transactions.

d) Required to make payment for day-to-day operations and expenses = Transactions Balance