For a person, it is generally advisable for them to hold at least 10% of their income in cash in the bank. This is not for investment, it is cash for long term savings. No risk should be attached to this savings. This is retirement money. In UK many people who invested in pensions have seen the value of the pension go down or disappear because of the financial crisis.

A business may decide to hold at least some of its assets in the form of cash in order to meet day to day commitments a business requires a certain amount of cash. Payments in respect of wages, overheads, goods purchased and so on must be made at the due dates. Cash is the lifeblood of a business. Unless it circulates through the business and is available for the payment of maturing obligations, the survival of the business must have sufficient cash to pay its debts when they fall due.

When cash flows are uncertain for any reason it would be prudent to hold a balance of cash. A customer which owes a large sum to the business may be in financial difficulties. In this situation the business can retain its capacity to meet its obligations by holding a cash balance. Similarly if there is some uncertainty concerning future outlays, a cash balance will be required.

Having cash puts you in a position to exploit profitable opportunities when they arise. A business may be able to acquire a competitor business which suddenly becomes available at an attractive price. Holding Cash has an opportunity cost for the business which must be taken into account. Thus when evaluating the potential returns from holding cash for speculative purposes, the cost of foregone investment opportunities must also be considered.

If a business is able to borrow quickly at a favorable rate then the amount of cash it needs to hold can be reduced.