What is a precautionary balance?
A) the cash a firm holds to counter the uncertainty surrounding its future cash needs
B) the cash a firm places into short-term investments
C) the cash a firm holds in order to pay its bills
D) the cash a firm holds to gain tax advantages

Question

Quizplus · Accepted Answer

A precautionary balance is the cash that a firm holds as a precaution to counter the uncertainty surrounding its future cash needs. This balance is held to ensure that the firm has enough cash to pay its bills and meet any unforeseen expenses. It is a type of buffer that helps a firm to manage its cash flow effectively and avoid financial difficulties. Therefore, option A is the best choice.

What Is a Precautionary Balance