There are three primary reasons for holding cash. First, cash is needed to satisfy the transactions motive. Transaction-related needs come from normal disbursement and collection activities of the firm. The cash inflows and outflows are not perfectly synchronized, and some level of cash holdings is necessary to serve as a buffer.
The second reason for holding cash is to meet sudden needs of cash, for example natural disasters, production accidents, delay of sales collection and sudden change of national policies.
The third reason is for speculation purpose. Sometimes adequate speculation in the security market or the raw material market may bring companies with additional benefits. For instance, if you expect the raw material price will go up in the near future, you can purchase relevant raw materials right now at a much lower price with your surplus cash.
