Surplus Cash Investment
Surplus cash cites to the excess cash accessible in an organization or company above the normal cash needs. Any idle cash earns no furthermore interest access and thus not productive. Hence, it has to be invested in interest bearing deposits or securities. To complete these tasks in a successful manner, the cash manager has to first compute the optimum level of cash requisite to carry out normal operations. Thus, any surplus cash accessibility will be known. After that, he has to select from the several channels of investment that render the best benefits.
Calculation of surplus cash
When the optimal cash need is known, any additional funds accessible are all surplus. Hence, the optimal cash need should be first computed. There are two ways to derive an optimal cash balance, viz:
Minimizing cost cash models
Cash budget
The elements that ascertain the requisite cash balances are:
Simulation of cash flows
Short costs which let in transaction costs, loss of cash-discount, cost linked with the deterioration of the credit rating and penalty rates
Excess cash balance costs
Management and Procurement
Uncertainty and doubtfulness
The minimum level of cash requisite by a company depends upon the number of days for which the cash balance would be adequate to meet the payments and other indebtedness and average daily cash outflows.
After figuring the surplus cash available, the next step is to invest the surplus cash in profitable investments. There are several elements to be looked at before selecting an investment channel.
Liquidity of Investment
Cash is a current asset is extremely requisite for preserving liquidity. To a very great extent, any investment of liquid current asset should be in investments that are liquid. For instance, marketable securities and short-term investments. This is since cash needs to be withdrawn to meet any unforeseen contingencies and emergencies.
I) Security and Safety:
Any investment mode chosen must be safe and secure adequate to reclaim the minimum principal invested. So, extremely risky securities should be avoided in order to ascertain security.
II) Return:
The investment is being attained to bring in a return out of it. So, several investments should be looked at in a portfolio after comparing the return each one one yields. Any return is linked with a level of risk. The investment must be opted based on optimal return and risk.
III) Maturity period:
Cash is a current asset does not remain redundant for a long period of time. So, different investment options with altering maturities should be looked at. Selecting an investment that has a maturity date equal to a certain cash responsibility in future could also be looked at.
Companies
Companies incline to be borrowers of capital. When companies have surplus cash that is not requisite for a short period of time, they may attempt to make money from their cash surplus by lending it by way of short term markets referred as money markets.
There are a small elite group companies that have very strong cash flows. These companies incline to be lenders rather than borrowers. Such companies may resolve to return cash to lenders as an alternative, they may attempt to make more money on their cash by lending it and investing in stocks and bonds.
Investors borrow money by way of bankers' loans for longer term mortgages or short term needs to help finance a employ purchase. Companies take over money to assist short or long term cash flows. They also take over to fund modernization or future business expansion.
Governments often find their spending needs exceed their tax revenues. To make up this deviation, they need to take over. Governments also take over on as the agent of municipalities, nationalized industries, other public sector bodies and local authorities. Governments take over by issuing bonds. Municipalities and local authorities may take over in their own name in addition as getting funding from national governments. Public Corporations typically let in nationalized industries. These may let in the postal services, railway companies and utility companies.
Many borrowers have trouble in raising money locally. They are required to borrow internationally with the assistance of Foreign exchange markets. Borrowers having alike needs can form into a group of borrowers. They can also accept an organizational form like Mutual Funds. They can render mortgage on weight basis. The main reward is that this lowers the cost of their borrowings.
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