Final answer:
A petty cash fund is a small amount of cash kept on hand for minor purchases, which provides quick liquidity. Cash is considered very liquid compared to other financial assets because it can easily be used for transactions without additional steps.
Step-by-step explanation:
A small amount of cash on hand to pay for minor purchases is commonly referred to as a petty cash fund. This petty cash serves as a readily available amount of currency that a company or an individual keeps to cover small, everyday expenses.
The liquidity of cash makes it ideal for these transactions, as opposed to other forms of financial assets like checks or credit cards, which may not be directly used for a medium of exchange or require additional steps to use (such as going to a bank or ATM to withdraw cash).
The concept of cash liquidity is significantly relevant here, indicating that liquid assets can quickly be converted into a medium that can directly facilitate the purchase of goods or services.
For example, cash you carry is more liquid compared to the money you have in a savings account. Within a business setting, the petty cash fund aids in managing expenses without compromising the liquidity necessary for smooth operations.
In the context of banking and loans mentioned in the provided information, it is worth noting that banks can be more flexible with their liquidity because they sell the loans they originate, converting these loans into securities rather than holding onto them.
The principle here is similar: maintaining liquidity is crucial for the smooth functioning of financial institutions and businesses alike.