Effective cash management involves the trade-off between the risk of insolvency (resulting in higher near cash balances)and the desire to earn higher returns (resulting in lower near cash balances).

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Effective cash management requires a balance between maintaining adequate liquidity to avoid insolvency and investing cash to earn higher returns. This balance involves a trade-off between these two goals, as increasing cash balances to minimize the likelihood of insolvency can lower returns, while reducing cash balances to increase returns can increase the risk of insolvency.

Effective Cash Management Involves the Trade-Off Between the Risk of Insolvency