(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.