Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

The three primary motives for holding cash are transactional, speculative, and precautionary.

The transactional motive refers to the need for cash to facilitate day-to-day operations, such as paying salaries, buying inventory, and covering operational expenses. This motive emphasizes the necessity of having liquid assets readily available to manage routine transactions efficiently.

The speculative motive involves holding cash to take advantage of potential investment opportunities as they arise. Businesses may choose to maintain a certain level of cash to ensure they can quickly invest in profitable ventures, purchase attractive assets, or capitalize on market fluctuations.

The precautionary motive reflects the need for cash as a safeguard against unexpected events or uncertainties. Companies may hold cash reserves to prepare for unforeseen circumstances, such as economic downturns, sudden expenses, or disruptions in cash flow, thus ensuring they can navigate challenges without significant financial strain.

This understanding highlights the strategic importance of liquidity management in business, allowing for operational efficiency while also creating opportunities for growth and security against risks.