Thursday, November 20, 2008

(21).WORKING CAPITAL MANAGEMENT- SHORT TERM INVESTMENTS.

Short -Term Investments.


Companies & other organisations sometimes have a surplus of cash & become "cash rich".A cash surplus is likely to be temporary, but while it exists the company should seek to obtain a good return by investing or depositing the cash, without the risk of a capital loss ( or at least ,without the risk of an excessive capital loss).


Three possible reasons for a cash surplus are:
  1. Profitability from trading operations;
  2. Low capital expenditure, perhaps because of an absence of profitable new investment opportunities;
  3. Receipts from selling parts of the business.
The board of directors might keep the surplus in liquid form:
  • To benifit from high interest rates that might be available from bank deposits , when returns on re-investment in the company appear to be lower;
  • To have cash available should a strategic oppertunity arise perhaps for the takeover of another company for which a cash consideration might be needed;
  • To buy back shares from shareholders in future;
  • To pay an increased dividend to shareholders.

Short Term Investments.
Temporary cash surplus are likely to be:
  • Deposited with a bank similar financial institution;
  • Invested in short term debt instruments. Debt instruments are debt securities which can be traded;
  • Invested in longer term debt instruments, which can be sold on the stock market when the company eventually needs the cash;
  • Invested in shares of listed companies , which can be sold on the stock market when the company eventually needs the cash.

1 comment:

Oscar Taylor said...

We must be careful on what kind of investment we will be getting.