In the solution to Activity 12.14, one of the three reasons for holding cash was to exploit opportunities. The example was given of the acquisition of a competitor business. What other types of opportunity could holding cash enable a business to pursue?

Data from Activity Solution 12.14

The three reasons are:

1. To meet day-to-day commitments. A business needs a certain amount of cash to pay for wages, overhead expenses, goods purchased and so on, when they fall due. Cash has been described as the lifeblood of a business. Unless it circulates through the business and is available to meet maturing obligations, the survival of the business will be put at risk. Simply being profitable is not enough to ensure survival.

2. For precautionary purposes. If future cash flows are uncertain, it would be prudent to hold a balance of cash.

For example, a major customer that owes a large sum to the business may be in financial difficulties. This could lead to an expected large receipt not arriving. By holding cash, the business could retain its capacity to meet its obligations. Similarly, if there is some uncertainty concerning future outlays, a cash balance will be needed.

3. To exploit opportunities. A business may decide to hold cash to put itself in a position to exploit profitable opportunities as and when they arise. For example, it may enable the acquisition of a competitor business that suddenly becomes available at an attractive price.