Determining the appropriate target cash balance involves assessing the trade-off between:

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Determining the appropriate target cash balance involves assessing the trade-off between the benefit and cost of liquidity. While cash provides liquidity to the company and enables it to meet its day-to-day expenses and obligations, holding too much cash can be costly as it earns lower returns and incurs costs such as storage, security, and insurance. On the other hand, holding too little cash can lead to missed opportunities, financial distress, and the need to rely on costly external sources of funds. Therefore, the appropriate target cash balance depends on the company's transaction needs, the cost of handling cash, and the cost of borrowing, balanced against the benefits of having adequate liquidity.

Determining the Appropriate Target Cash Balance Involves Assessing the Trade-Off