The Transaction Motive

Cash is needed to satisfy the transaction motive, the need to have cash on hand to pay bills. Transaction-related needs come from the normal disbursement and collection activities of the firm. The disbursement of cash includes the payment of wages and salaries, trade debts, taxes, and dividends.

Cash is collected from product sales, the selling of assets, and new financing. The cash inflows (collections) and outflows (disbursements) are not perfectly synchronized, and some level of cash holdings is necessary to serve as a buffer.

As electronic funds transfers and other high-speed, "paperless" payment mechanisms continue to develop, even the transaction demand for cash may all but disappear. Even if it does, however, there will still be a demand for liquidity and a need to manage it efficiently.

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