Final answer:
Financial managers keep small amounts of cash known as transaction balances. These balances are necessary for daily transactions and managing liquidity while striving to avoid excess non-interest-bearing cash. Similar to banks, businesses hold such reserves to facilitate operations.
Step-by-step explanation:
Idle cash typically does not earn interest for the company; hence, financial managers aim to maintain small amounts of cash on hand known as transaction balances. This practice is essential for ensuring sufficient funds are available for day-to-day operations and unexpected expenditures without holding excessive amounts of non-interest-bearing cash.
Liquidity is a critical concept in finance that refers to how quickly a financial asset can be used to buy a good or service. Cash is highly liquid and is necessary for transactions; however, too much liquidity, such as in the form of idle cash, can lead to opportunity costs for the business.
Banks, due to reserve requirements, often have to maintain a certain amount of cash on hand that doesn't earn interest. Therefore, businesses, much like banks, manage their own reserve requirements by holding transaction balances which serve as a cushion for daily financial activities.