Investing Excess Cash
Cash management requires a careful assessment of the level of cash maintained by the business to meet its obligations while ensuring that idle funds are invested. In principle, the level of cash on hand should be kept at a minimum. The business should maximize opportunities to earn income on excess cash. How then may excess cash be invested?
- Short-term investments – these may be in the form of marketable securities and money market placements transacted with a bank. Some variants offer maturity periods (or tenors) for as short as 7 days. Typically though, placements with banks are generally quoted based on 30, 60 or 90 days. An entrepreneur should select the maturity period which will match his cash requirements.
- Investment in mutual funds – there are four types:
- stock or equity funds – invest primarily in shares of stock issued by Philippine companies.
- bond funds – invest mainly in long-term, fixed-income instruments, such as government securities.
- money market funds – invest solely in short-term (one year or less) debt instruments.
- balanced funds – invest in both shares of stock and debt instruments.
- Investment in additional assets – excess cash may also be used for the purchase on installment basis of assets which can increase in value over time, such as land or condominium units. This option is best taken when there is some degree of predictability of the cash available for such investments.