Investing Short/Medium Term Cash Surpluses

The main types of cash surplus are: Short Term Cash - 1-30 day surpluses (including daily and overnight), Medium Term Cash - 1-9 month surpluses, and Long Term Cash - 9+ months to many year surpluses. The short term surpluses need to be invested in instruments that are easy to

set up and also to unwind, so the liquidity can be released in time to meet unforeseen requirements or market fluctuations.

Investment Options
The main short/medium term investment options include:

  • Bank Current Accounts paying credit interest. These are generally available in local and international currencies, but in some countries the payment of interest on current accounts is prohibited. Interest rates on current accounts are typically low and a minimum balance may be needed to qualify for interest.
  • Bank Time Deposits / Money Market Deposits, - monies are placed for a fixed period, e.g. overnight, days, weeks or months. A minimum amount may be required and also notice of withdrawal may be required. Bank time deposits are useful when the investment period is known and the funds will be held until the end of the term. They are also useful as a means of rewarding members of a core banking group, as part of a portfolio of investments, and when a low risk investment is required.
  • Certificates of Deposit (CD) are a bank-issued investment instrument. They are like a term deposit in which the bank is committed to repay the principal plus interest on a fixed maturity date, but with the additional advantage over time deposits of being much more liquid because they are negotiable and can be traded in secondary markets.
  • Commercial Paper (CP) is a short-term, unsecured promissory note relying on the credit-worthiness of the issuer and is normally negotiable. There are some forms of CP programme in most domestic markets, the largest is in the USA. CP offerings have different maturity periods, and, because CP is relatively liquid, they can be redeemed early in the secondary market.
  • Asset-Backed Commercial Paper (ABCP) is a short-term, unsecured promissory note which is supported by specific assets. ABCP is less common than CP, because it is much more complex to set up and for the investor to assess. There are secondary markets for ABCP, but in the recent credit crisis the market for ABCP disappeared.
  • Treasury Bills (T-bills) are debt securities issued by governments, typically for periods of one day to a year offer low credit risk, a variety of maturities and excellent liquidity due to constant trading.
  • Repurchase Agreements (Repos) are a two stage transaction agreement to sell and repurchase securities (typically government) at an agreed price. It is a form of secured lending, and rates are similar to time deposits, but has the major drawback of being quite complex to setup.
  • Money Market Funds which invest in short-term high-quality debt instruments (typically AAA rated) have grown rapidly because they offer a wide range of maturities, daily access, and now more transparency on the investment policies used. (See Money Market Fund Investments.)

An alternative use of cash surpluses is to invest in paying invoices early with those suppliers who will offer discount for quick payment. For cash rich companies, dynamic discounting currently offers the most flexible and highest returns on surplus cash. (See Investing Liquidity in Early Payment of Payables.)

Investment Policy
Company policy for investing cash surpluses are very different because their basic liquidity requirements and business flows, and attitude to risk varying so much. Over the last 2-3 years because of the credit crisis, companies have become significantly more risk averse, particularly in respect of bank counter-party risk.

The Investment Process
Investing is a complex process and can be very time consuming. All investment decisions involve: 1) choosing the level of security, i.e. the funds/capital preservation required, 2) deciding how long the funds will be invested, and 3) assessing what level of yield can be achieved without compromising liquidity and capital preservation. No wonder many companies use external advisers and specialists to implement their investment policy.

Most banks and money market funds are automating the placement of funds by providing fully automated links to their interest earning and/or money market fund accounts. There is also a inceasing number of investment portals, which enable companies to automate their investments with a wide range of banks and money market funds - see Investment Portals.

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