Precautionary Motive

“The desire to keep extra money in case an unforeseen situation requires a capital outlay. For example, one may wish to save extra money to pay for medical bills in case of an accident. According to John Maynard Keynes, people keep savings accounts, as well as some stocks and commodities, with a precautionary motive in order to cover unexpected events”.

Precautionary motive is that sometimes the company may face uncertain situation arising due to legal proceedings against. The management of cash involves efficient collection of cash. The efficient disbursement of cash and efficient collection of cash.

The efficient collection of cash means the speeding up of cash collection and the efficient disbursement means delay in the payments to the suppliers through legal means.

Whenever a company makes payments it should pay through cheques the processing of this cheque has the following steps:

  1. The company preparer the cheque.
  2. The other receive the cheque and enter into its books.
  3. The company deposits the cheque into its bank accounts.
  4. The company receive the payment.

These steps are called the collection float of the company. Normally the collection float takes at least five to six days.

Ways to speed up the Cash Collection

The cash collection process can be speed up in following ways;

  1. The company should adopt the lock box system.
  2. The company should adopt the wire system.
  3. The company should adopt the EDI system (Electronic data interchange).
  4. In the presence of World Wide Web, the company should go for electronic commerce.
  5. The company should adopt the concentration banking means.

corporate finance

October 13, 2019