The Management of Cash and Marketable Securities

Abstract

This chapter describes the management of cash and marketable securities. The transactions motive looks at the holding of cash to meet current transactions. The need for spare cash to transact business arises because cash inflows do not always equal outflows, and there are definite, and often fixed costs involved in converting even highly liquid assets such as marketable securities into cash. Consequently, it is both impractical and expensive to make such conversions too frequently, and for small amounts each time. Even as individuals, one does not withdraw cash from savings accounts several times a week in $10 amounts, simply because to do so would prove inconvenient and time-consuming. Reasonable cash balances are maintained, therefore, to meet daily transactions and to minimize the nuisance and costs of having to replenish holdings too frequently. The amount of cash held depends on the typical volume of business, and possibly on the interest that can be earned if excess cash is invested.