The motives for holding cash in bank and the objectives of inventory management

Q. Describe the motives for holding cash in bank.

Transaction Motive: Transaction motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronized with cash receipts.

Precautionary Motive: Precautionary motive implies the need to hold the cash to meet unpredictable obligations.

Speculative Motive: It refers to the desire of a firm to take advantage of opportunities which present themselves at unexpected moments and which are typically outside the normal course of business.

Compensation Motive: Customers of a bank are usually required to maintain a minimum cash balance at that bank for providing services to them. Since this balance cannot be utilized by the firms for transaction purposes, the bank themselves can use the amount to earn a return.

Q. Explain the objectives of inventory management.

The main objectives of inventory management is to maintain inventory at appropriate level to avoid excessive or shortage of inventory because both the cases are undesirable for business. Thus, management is faced with the following conflicting objectives:

(1) To keep inventory at sufficiently high level to perform production and sales activities smoothly.

(2) To minimize investment in inventory at minimum level to maximize profitability.

(3) To ensure that the supply of raw material & finished goods will remain continuous so that production process is not halted and demands of customers are duly met.

(4) To minimize carrying cost of inventory.

(5) To keep investment in inventory at optimum level.

(6) To reduce the losses of theft, obsolescence & wastage etc.

(7) To make arrangement for sale of slow moving items.

(8) To minimize inventory ordering costs.