7

CASH MANAGEMENT
CHAPTER OBJECTIVES
Understand the nature of cash.
Motives for holding cash.
Cash management.
Managing cash flows
Determining optimum cash balance.
Cash management models.
Ivestment of surplus funds.
Management of marketable securities.

INTRODUCTION
Cash is one of the current assets of a business. It is needed at all
times to keep the business going.
A business concern should
always keep sufticient cash for meeting its obligations. Any
shortage of cash
will hamper the operations of a concern and any excess of it will be
unproductive. Cash is the most
unproductive of all the assets. While fixed assets like machinery, plant, etc. and current assets such as
inventory will help the business in increasing its earning capacity, cash in hand will not add anything to the
concern. It is in this context that cash management has assumed much
importance.
NATURE OF CASH
For some persons, cash means only money in the form of curreney (cash in hand). For other
eTsons, cash means both cash in hand and cash at bank. Some even include near cash assets in it. They
ake marketable securities too as part of cash. These are the securities which can easily be convereted
into cash. These viewpoints reflect the degree of freedom of the persons using the cash. Whether a
PTSOns wants to use it immediately or can wait for a time to use it depends upon the needs of the
concernedd person.
Cash itself does not produce goods or services. It is used as a medium to acquire other assets. t

ner which are used in maufacturing goods or providing services. The idle cash can be deposited
assets
In
bank to earn
interest.
cash
Dusiness has to kecp required cash for meeting various needs. The assets acquired by
again
A
help the business in are sold to acquire cash.
producing cash. The goods manufactured or services produced
A
A
fim hness does not have sufficient cash
with it,
it wi
willa v
have
e to mamaintain a critical level of cash. If at a time it
will havetoto borrow fron the market for reaching the required level.
more than
and cash outflows. Sometimes cash receipts are
remains a gap between cash inflows
theDam to synchronise the
cash inflows
tries
ments or it may be
and cash out be vice-versa at another time. A financial manager
of receipts
seldom found in the real world. Perfect synchronisation
WS. But this situation is
and payments
nents of cash is only an ideal situation.
 7.2

HOLDING CASH
MOTIVES FOR
to the following needs Transactions motive
attributed
The firm's
Precautionary needs
motive and Speculative may be Some people are of the view that a business requires cash
for cash motive. scussed
only
motive also remains. These motives are discn
while others feel that speculative
for the first two motives
as follows
. Transaction Motive
to day operations. is needed
The cash to
firm needs cash for making transactions in the day
A
dividend, etc. The cash needs arise due to the fact that there is no

make purechases. pay expenses, taxes, Sometimes cash receipts exceed cash
between cash receipts and payments.
complete synchronisation because the expected payments in
or vice-versa. The transaction needs of cash can be anticipated
payments but the things do not happen
near future can be estimated.
The receipts in future may also be anticipated
be raised through bank overdraft. On
as desired. if more cash is
needed for payments than receipts, it may
it may be spent on marketable securities. The
the other hand if there are more cash receipts than payments,
dividend payment.
maturity of securities be adjusted to the payments in future such as interest payment,
may
etc

2. Precautionary Motive
A firm is required to keep cash for meeting various contingencies. Though cash inflows and cash
outlows are anticipated but there may be variations in these estimates. For example, a debtor who was to
pay after 7 days may inform of his inability to pay; on the other hand a supplier who used to give credit
for 15 days may not have the stock to supply or he may not be in a position to give credit at present. In these
situations cash receips will be less then expected and cash payments will be more as purchases may have to
be made for cash instead of credit. Such contingencies often arise in a business. A firm should keep some
cash for such contingencies or it should be in a position to raise finances at a short period. The cash
maintained for contingency needs is not productive or it remains ideal. However, such cash may be invested
in short-period or low-risk marketable securities which may provide cash as and when necessary.
3. Speculative Motive
The speculative motive relates to holding of cash for investing in profitable opportunities as and when
they arise. Such opportunities do not come in a regular manner. These opportunities cannot be scientifically
predicted but only conjectures can be made about their occurance. For example, the prices of shares and
securities may be low at a time with an expectation that these will
go up shortly. The prices of raw materials
may fall temporarily and a firm may like to make purchases at these
of if a firm has cash balance with it. These transactions are
prices. Such opportunities can be availed
a direction in which we
speculative because prices may not move in
suppose them to move. The primary motive of a firm is not to
transactions but such investments may be made at times. indulge in speculative

CASH MANAGEMENT
Cash management has assumed importance because it is the most
It is required business obligations and it is
to meet significant of all the current asset
Cash management deals with the
unproductive when not used.
(i) Cash inflows and outflows
following
(ii) Cash flows within the firm
ii) Cash balances held by the firm at a
point of time.
Cash management needs strategies to deal
with various facets
facets of cash. Following are some ot

ay Cash Planning
Cash planning is a technique to plan and control the use of eash. A
projected cash flow state ment
 C a s ha n a g e m e n t

renared, based the

on present Dusiness operations and
ay b s sources may be anticipated and cash
anticipated future activities. The cash
inflows
from outflows will determine the
Forecasts and Budgeting possible uses of cash.
(b) Cash
budget is the most important device for the control
Acash
i s an estimate of cash receipts and disbursements of receipts and payments of cash. A cash
during a future
period of time. It is an analysis of
dof cash in a business over a uture, Snort or long period of
and outlay.
time. It is a forecast of expected cash intake
The short-term forecasts can be made with the
help of cash flow
projections. The finance
make
will estimates of likely receipts in the near future and the manager
nossible to make exact forecasts even then estimates expected
it is not
disbursements in that period. Though
of cash flows will enable the
arrangement for cash needs. t may so happen that expected cash receipts may fall planners to make
Ceed estimates. A financial manager should keep in mind the sources from short or
payments may
where he will meet short-tem
peds. He should also plan for productive use of
ne
surplus cash for short periods.
The cash
long-term forecasts
are also essential for
proper cash planning. These estimates may
he four, five or
for three, more years.
Long-term forecasts indicate company's future financial needs for
working capital, capital projects, etc.
Both short-term and long-term cash forecasts be made may with the help of following methods:
(i) Receipts and disbursements method
(ii) Adjusted net income method.
a) Receipts and Disbursements Method. In this method the
estimated. The cash receipts may be from cash sales, collections from receipts and payments of cash are
debtors, sale
of dividend or other incomes of all the items; it is difficult to forecast sales. The of fixed assets, receipts
sales may be on cash as
well as credit basis. Cash sales will bring
receipts at the time of sale while credit sales will
(credit sales) will depend upon the credit policy of the firm. bringtluctuation
on. The collections from debtors
cash later
in sales will disturb the receipts of cash. Any
Payments may be made for cash purchases, to creditors for goods.
purchase of fixed assets, for meeting operating expenses such as wage bill, rent, rates. taxes or other
usual
expenses, dividend to shareholders etc.
The receipts and disbursements are to be
equalled over a short as well as long
in receipts will have to be met from banks or other sources. Similarly, surplus cash periods. be
Any shortfall
invested in risk
free marketable securities. It may
may be easy to make estimates for payments but cash
receipts may not be
accurately made. The payments are to be made by outsiders, so there may be some problem in finding out
the exact
receipts at a particular period. Because of uncertainty. the reliability of this method be reduced. may
(ii) Adjusted Net Income Method. This method may also be known as sources and
generally has three sections sources of cash, uses of cash and adjusted cash balance. The adjustedapproach.
net
uses

ncome method
helps in projecting the company's need for cash at some future date and to see whether the
ompany will be able to generate sufficient cash. If not, then it will have to decide about borrowing or issuing
Es, etc. In preparing its statement the items like net income, depreciation, dividends, taxes, ete. can
cabuy be determined from company's annual operating budget. The estimation of working capital movement

instticult because items like receivables and inventories are influenced by factors such as fluctuations
helaterial costs, changing demand for company's products and likely delays in collections. This method
in
keeping a control on working capital and anticipating financial requirements.
MANAGING CASH FLOWS
After the cash flows, efforts should be made to adhere to the estimates of receipts and
estimating
dish nents, cash. Cash management will be successful only if cash collections are accelerated and cash
as far as possible, are delayed. The following methods of cash management will help:
 'anh Meanugement
Methods of Accelerating C'ash Inflows
inllows, the collections from eustomers
Payment by C'ustomers. In order
Prompt This will be possible by prompt billing.
1. to accelerate cash
should be prompt. The customers should be promptly informed about
the amount payable and the time by which it should be paid. It will be better il self addressed envelope
IS sent alongwith the bill and quick reply is requested. Another method lor prompting customers to pay earlier
The availability of discount is a good saving for the customer and in an
is to allow them a cash discount.
anxiety to earn it they nake quick payments.
2. Quick Conversion of Payment into Cash. Cash inflows can be accelerated by improving the
cash eollecting process. Once the customer writes a cheque in favour of the concern the collection can be
sent by the customer and the amount
quickened by its early collection. There is a time gap between the cheque
collected against it. This is due to many factors, (i) mailing time, i.e. time taken by post oflice for transfering
cheque from customer to the firm, referred to as postal Nont: () tinme taken in processing the cheque within
the organisation and sending it to bank for collection, it is called lethargy and, (ii) collection time within
the bank. ie. time taken by the bank in collecting the payment from the customer's bank, called bank
noat. The postal float, lethargy and bank float are collectively referred to as deposit noat. The term deposit
loat refers to the cheques written by the eustomers but the amount not yet usable by the firm. An eflicient
cash management will be possible only if the time laken in deposit loat is reduced and make the money available
for use. This can be done by decentralising collections.
3. Decentralised Collections. A big firm operating over wide geographical area can accelerate
collections by using the system of decentralised collections. A number of collecting centres are opened in
diferent areas instead of collecting receipts at one place. The idea of opening different collecting centres is
to reduce the mailing time from customer's despatch of cheque and its receipt in the firm and then reducing
the time in collecting these cheques. On the receipt of the cheque it is immediately sent for collection. Since
the party may have issued the cheque ona local bank, it will not take much time in collecting it. The amount
so collected will be sent in the central oflice at the earliest. Decentralised collection system saves mailing and
processing time and, thus, reduces the financial requirements.
4. Lock Box System. Lock box system is another
technique of reducing mailing, processing and
collecting time. Under this system the firm selects some collecting centres at different places. The places are
selected on the basis of number of consumers and the remittances to be received
from a particular place. The
firm hires a Post Box in a post office and the parties are asked to send the
A local bank is authorised to operate the
cheques on that post box numebr.
post box. The bank will collect the post a number of times in
a day and start the collection
process of cheques. The amount so collected is credited to the firm's
The bank will prepare a detailed account of account.
cheques received which will be used by the firm for processing
purpose. This system of collecting cheques expedites the collection
process and avoids delays due to mailing
and processing time at the accounting department.
By transferring clerical function to the bank, the firm
reduce its costs, improve internal control and reduce the may
possibility of fraud.
Methods of Slowing Cash Outlows
A
company can keep cash by effectively controlling disbursements.
cash outtlows is to slow down the The objective of controlling
payments as far as possible. Following methods can be used
disbursements to delay

1. Paying Last Date. The disbursements can be

on
date only. If the credit is for 10 days then delayed on making payments on the last due
payment should be made on 10th
day
the money for short periods and the firm can
make use of cash
only. It can help in using
discount also.
2. Payments through Drafts. A company can delay payments
instead of giving cheques. When a cheque is issued then the by issuing drafts to the suppliers
its account so that the cheque company will have to keep a balance in
is paid whenever it comes. On the
other hand a draft is payable
only on
ash anagement 1.5
nresentatio fo the issuer. The receiver will give the draft to its bank for presenting it to the buyer's bank
i takes a nunmber of days before it is actually paid. The company can economise large resources by using
this method. The funds so saved can be invested in highly liquid low risk securities to earn income thereon
3. Adjusting Payroll Funds. Some economy can be exercised on payroll funds also. It can be done
by reducing the frequency of payments. If the payments are made weckly then this period can be extended
to a month. Secondly, finance manager can plan the issuing of salary cheques and their disbursements. If
the cheques are issued on saturday then only a few cheques may be presented for payment, even on Monday
all cheques may not be presentea On the basis of his past experience finance manager can deposit the money
in bank because it may be clear to him about the average time taken by employees in encashing their pay
cheques.
4. Centralisation of Payments. The payments should be centralised and payments should be made
through drafts or cheques. When cheques are issued from the main office then it will take time for the
cheques to be cleared through post. The benefit of cheque collecting time is availed.
5. Inter-bank Transfer. An efficient use of cash is also possible by inter-bank transfers. If the
company has accounts with more than one bank then amounts can be transferred to the bank where
disbursements are to be made. It will help in avoiding excess amount in one bank.
6. Making use of Float. Float is a difference between the balance shown in company's cash book (Bank
column) and balance in pass book of the bank. Whenever a cheque is issued, the balance at bank in cash
book is reduced. The party to whom the cheque is issued may not present it for payment immediately. If
the party is at some other station then cheque will come through post and it may take a number of days
before it is presented. Untill the time, the cheques are not presented to bank for payment there will be
a balance in the bank. The company can make use of this float if it is able to estimate it correctly.

DETERMINING OPTIMUM CASH BALANCE

A firm has to maintain a minimum amount of cash for settling the dues in time. The cash is needed
to purchase raw materials, pay creditors, day to day expenses, dividend, etc. The test of liquidity of the fim
IS that it is able to meet various obligations in time.

Some cash will be needed for transaction needs and amount may be kept as a safety stock. An
appropriate amount of cash balance to be maintained should be determined on the basis of past experience
uture expectations. Ifa firm maintains less cash balance then its liquidity position will be weak. If higher
cash balance is
maintained then an opportunity to earn is lost. Thus, a firm should maintain an optimum
ash balance, neither a small nor a large cash balance. For this purpose the transaction costs and risk of too
Uaa balance should be matched with the opportunity costs of too large a balance.

are basically two approaches to determine an optinmal cash balance, namely, (i) Minimising
0S1
nere and
ost Models, (i) Preparing Cash Budget. Cash budget is the most important tool in cash management.

CASH BUDGET
future period of
budget is an estimate of cash receipts and dibursenments of cash during
a

ncash
e words of soloman Ezra, a cash budget is "an analysis of flow of cash in a business over a future
It is device to plan and
period of time. It is a forecast of expected cash intake and outlay." a
Control the guse of
Contro be excess or shortage
of cash. Thus, cash. The cash budget pin points the period when there is likely tomake arrangements tor
can plan the use of excess cash
and
the nece 4 m by preparing a cash budget
ry cash as and when required.
collections for sales,
eCash receipts from various sources are anticipated. The estinmated cash
debls, bills rec investments and other assets
will
be vables, interests, dividends and other incomes and sale of
taken into i
account. on purchase of materials, payment
to ereditors and nmeeting
Various other reven The amounts to be spent torecasts will include all
should be considered. Cash
possible sou rOIm
and capital expenditure needs
which cash will be received and the channels in which payments are to be made so
that
 cost of 10,000.

INVESTMENT OF SURPLUS FUNDS

There are, Sometimes, surplus funds with the companies which are required after sometime. These
uands can be
employed in liquid and risk free securities to earn some income. There are a number of avenues

wITe these funds can be invested. The selection of securities or method of investment is very mportant.
Te of these methods are discussed herewith :
Earier
1. Treasury Bills.The treasury bills are issued by RBI on behalf of the Central Govenment
reasury 0n rates
on tap systen, ie..
15Sued on the basis of tenders floated regularly but now are available
is not
unced by RBI every week. These bills are issued only in bearer form. Name of the purchaser
by RBI
Fe to another. No
interest is paid
Tuerntiuoned
onthe bills, rather they are easily transferable from one investor bill. Since
thebills but the return is the difference between the purchase price and face (par) value of the market
active secondary
ere is a free securities. A very
ists for backing
of the Central Government, these are risk marketable
these bills are one of the popular
bills so it has made them highly liquid. Treasury
i e s even be low
though the vield on them may
 7.16 Cash Aanagement
2. Negotiable Certificates of Deposit (CD's). The money is deposited in a bank for a
of time and marketable receipt is issued. The receipt may be registered or bearer, the
fixed fixed period
latter
transactions in the secondary market. The denominations and maturity periods are decided as
per
facilitates
thes
of the investor. On maturity the amount deposited and interest are paid. The CD's are
treasury bills which are issued on discount. The short-term surplus funds
diferent f ds
can be used to eam inte the
this method. The investment is secure unless the bank fails, the chances of which are
remote. interest in
Unit 1964 Scheme. The Unit Trust of India's unit 1964 scheme is very popular for
making shart
investments. It is an open ended scheme which allows investors to withdraw their funds on a term
continuing hae:
asis.
The units have a face value of 10. The purchase and sale value of units is not based on net
assets val
salue
but it is delermined administratively in such a manner that they rise gradually over
time
The unit scheme offers a good avenue for investing short-term funds and has the following
advantages
(i) The dividend income from unit received by companies is treated as inter-corporate dividend
it qualifies for tax exemption upto 80 per cent under Sec. 80M of the Income Tax Act. Man
Many
companies purchase cum-dividend units in May, collect dividend in July and then sell theuni
(ii) The yield can be increased by a careful synchronising of the purchase and sale of units becaue
the capital loss on sale of units would qualify for a tax set-ofi, of which 80 per cent of the
dividend income would be tax free.
(ii) There is an active secondary market for units, there will be no liquidity problem.
4.Ready Forwards. A commercial bank or some other organisation may enter into a ready forward
deal
with a company willing to invest funds for a short period of time. Under this system the banksellsand
repurchases the same security (that means that company purchases and sells securities in turn) at pre
determined prices. The difference between the purchase and sale price is the income of the
company. Ready
forwards are generally done in units, public sector bonds or government securities. Ready forward deals are
linked with the position of the money market. The investor can hope to earn more if money market is
tight
during busy season and at closing of the year.
5. Badla Financing.Badla financing is used in stock exchange transactions when a broker wants to
carry forward his transactions from one settlement period to another. Badla financing is done through operators
in stock exchange. It is the financing of transactions of a broker who wants to carry forward this deal to
the other settlement period. The badla rates are decided on the day of settlement. Badla transaction is
financed on the security of shares purchased whose settlement is to be caried forward. Sometime this
financing facility may be extended for a particular share only. For example, a company may provide bada
finance to a broker 10 crores for purchasing ACC shares in forward market. Badla rates varywith demand
and supply position of funds.
Badla financing offers attractive interest rates. However, it becomes risky if the broker defaults in his
commitment. Even the wide fluctuation in prices of shares may also affect the value of security. An investor
in this type of financingshould be careful about following things
(i) The selection of a broker should be on the basis of reputation.
(ii) The shares with a sound interinsic value should be selected.
(ii) The margin should be adequate.
(iv) The possession of securities should be taken.
6. Inter-Corporate Deposits.These are short term deposits with other companies which attract a g
rate of return. Inter-corporate deposits are
of three types: takes
i) Call Deposits.lt is a deposit which a lender can withdraw on one day's notice. In pracuccif
to get this money. The rate of interest at present is i4 per cent on these
three days
(i) Three Months Deposits. These deposits are popular and are used by borrowers totide over sho
deposi
rdraft
term inadequacy of funds. The interest rate on such deposits is influenced by bank overo
interest rate and at present the borrowing rate is 22 per cent per annum.
(ii) Six-month Deposits. The lenders may not have surplus funds for a very long period. Six
 77
neriod is normally
the maximum which lenders
may prefer T he curTent nterest rate on thes
deposits iS 4per cent per annum
i n t e r corporate deposits are unsecured loans, the
creditworthincss of the borrower thould e
ction :70 of the Company's Act has placed certain
restriction on inter compnay deposits
should be adhered to,
a s C e r t a i n e d

these provisions these provisions are

A
company cannot lend more than 10 per cent of its net worth
any single company (equity plus free reserves) to
b The total lending of a company cannot exceed 30
per cent of its net worth
approval of the central government and a special resolution should permit without the prio
such a lending
. Bill Discounting. A bill arises out of credit sales.
The buyer will
accept a bill drawn on him
h a seller. In order to raise runds the seler may get the bill discounted with his
bank. The bank will charge
t2nd release the balance amount to the drawer. These bills
normally donot exceed 90 days.
A company may also discount the bills as a bank does thus
ounting is considere superior to inter-corporate deposits. using its surplus funds. The bili
The company should ens that the
ted bills are (a) trade bills (resulting from a trade
transaction) and not accomodation bills
O
each
her (b) the bills backed by the letter of credit of a bank will be most secure as these are (heiping
the drawee's bank. guaranteed
by
8. Investment in Marketable Securities. A fim has to maintain a reasonable
balance of cash. This
is necessary because there is no perfect balancing of inflows and outflows of cash. Sometimes more cash is
areived than required for quick payments. Instead of keeping the surplus cash as idle. the firm tries to invest
it in marketable securities. lt will bring some income to the business. The cash surpluses will be available
uring slack seasons and will be required when demand picks up again. The investment of this ca in
securities needs a prudent and cautious approach. The selection of securities for investment should be
made so that the amount is raised quickly
carefully on demand.
In choosing among alternative securities, the firm should examine three basic
features of a security
:safetry, maturity and marketability. The security element deals with the absence of any type of risk. The
securities with risk may give higher returns but these should be avoided. Theere should not be any default
in payment when the securities are redeemed. The maturity periods will
give higher returns. The short-
period securities will carry lower rates of interest but these should be preferred. The surplus cash can
be invested only for smaller periods because the amount
may be required for meeting operating cash needs
in the short periods. The securities should have a
ready market. These investments can be made only in near
cash securities. If the securities selected are such which
require sonme time for realisation then there may be
Payment problems. So, the securities should have a ready market and may be realisable in a
9. Money Market Mutual Funds
very short period.
(MMMF) 'Money market mutual fund' means a scheme of a mutual
fund which has been set
up with the objective of investing exclusively in money market instruments. These
Instruments include treasury
bills, dated Government securities with an expired maturity of upto one year. call
ecemoney, commercial paper, commercial bills accepted by banks and certificates of deposits. Till
ccently, only commercial banks and public financial institutions were allowed to set up MMMFs. But in
vember 1995, the Government has permitted private sector mutual funds also to set up money market mutual
MMMFs are wholesale markets for low risk, high liquidity and short-term securities. The main feature of
'S fund is the
access to persons of small savings
IANAGEMENT OF MARKETABLE SECURITIES
The
e marketable securities are the short-term highly liquid investments in money market instruments that
can
ha D e converted into cash. A firm has to maintain a reasonable balance of cash to keep the business
ing. This is in fact both are
n necessary because there is no balancing of intlows and outtlows of cash,
and uncertain. Sometimes more cash is received than required for immediate payments. Instead
of
keepi the surplus cash as idle, the firm should invest it in marketable securities so as to earm some ineonme
 7.18
Cash.
tothe business. As the amount of cash kept in the business earns
Management
no explicit return, the firm shoula.
minimum level of cash and the excess balance of cash may be invested in marketable hold
well securities which
some return as as provide opportunities to be converted easily into cash
(through sale of securiti
and when required.
) as
The of investments in marketable securities is an
management
cash and important function of financial
management. As marketable securities are closely related, cash
investment in marketable securities also. However,
management should take care af h
management marketable securities should include he
of
(a) Determining the amount of marketable securities to be
kept.
(b) Choosing among alternative securities.
While determining the amount of marketable securities
to be maintained the financial
Know the minimum amount that must be
kept in the form of cash. The cash management models,managerwhich
must

already been discussed in this chapter, may be used to determine the have
at which marketable securities should
be purchased or sold. As a
optimum balance of cash and the level
general rule, a firm should
maintain
cash balance to meet its
requirements for the normal transactions, and the cash balance minimum
a

precautionary motive or to meet temporary or seasonal exigencies may be maintained in the form required for
securitites. of marketable
The basic objective of investment in
marketable securities is to earn some return for the
Thus, the return available is an busines.
important criterion while choosing among the alternative securities,
investment of surplus cash in marketable securities yet
needs a prudent and cautious
securities should be carefully made so that cash can be approach. The selection of
raised quickly on demand by sale of these
The following are some of the securities.
important factors that should be considered while choosing among altemative
securities to be purchased
1. Safety. Since a firm invests cash in
marketable securities to earn some return on
back into cash easily through sale of securities as surplus
with the primary motive of cash but
converting them
and when
, the firm will tend to invest in
very safe marketable securities. The risk level associated with a
required
of principal amount invested is, loss in value
thus, the most important factor while
securities. A firm should prefer to invest in those securities where choosing among the alternative
the risk of default or failure at the time
when needed is minimum. The
safety element deals with the absence of any type of risk. The securities with
risk may give higher returns but these should be avoided.
The investment should be made in 'safe financial
instruments in such a way that there is no default in
payment when the securities are redeemed. The financial
manager should always keep in mind that saftety of principal amount is of
higher return investments. greater importance than the risky
2.
Maturity. The maturity of the marketable securities should be matched with the
which the surplus cash is expected to be available. length of time for
Usually, a firm invests cash for a period shorter than the
surplus cash availability period. Depending upon the needs, firms may invest cash in marketable securities with
maturities short as over night or as long as six to nine months.
as
Although the longer maturity periods give
higher returns, the short period securities should be preferred.
3. Liquidity and Marketability. Liquidity referes to the ability to convert a security into cash
immediately without any significant loss of value. Although, marketable securities by nature are all marketabie.
yet care must be taken that the selected investment can be easily, convenienty and speedily converted into
cash. If the secruities selected are such which
require some time for realisation then there may be problems
of cash. So the securities selected should have ready market and may be realisable in a very short-period as
and when required even before the maturity date.
4. Return Yield. Other things equal, a firm would like to choose the securities which give
or
higne
return of yield on its investment. However, it must be remembered that safety and liquidity risk are of greater
importance han the return risk in making decision about investments in marketable securities