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Surplus Cash Investment

Surplus Cash Investment Assignment / Homework Help
Surplus cash refers to the excess cash available in an organization or firm above the normal cash requirements. Any idle cash earns no further interest and therefore not productive. So, it has to be invested in interest bearing securities or deposits. To successfully complete these tasks, the cash manager has to first calculate the optimum level of cash required to carry out normal operations. Thus, any surplus cash availability will be known. After that, he has to choose from the various channels of investment that give the best benefits.

  • Calculation of surplus cash

    When the optimal cash requirement is known, any additional funds available are all surplus. Hence, the optimal cash requirement should be first calculated. There are two approaches to derive an optimal cash balance, namely
    • Minimizing cost cash models
    • Cash budget

    The factors that determine the required cash balances are:
    • Synchronization of cash flows
    • Short costs which include transaction costs, borrowing costs, loss of cash-discount, cost associated with the deterioration of the credit rating and penalty rates
    • Excess cash balance costs
    • Procurement and Management
    • Uncertainty

    The minimum level of cash required by a firm depends upon the number of days for which the cash balance would be sufficient to meet the payments and other obligations and average daily cash outflows.
  • Choosing the channels of Investment

    After estimating the surplus cash available, the next step is to invest the surplus cash in profitable investments. There are various factors to be considered before choosing an investment channel. They are:

    • Liquidity of investment:

      Cash, being a current asset is highly required for maintaining liquidity. So, any investment of liquid current asset should be in investments that are liquid. Example: Marketable securities and short-term investments. This is because cash needs to be withdrawn to meet any unforeseen contingencies and emergencies.
    • Safety and Security:

      Any investment mode chosen must be safe and secure enough to recover the minimum principal invested. So, highly risky securities should be avoided to ensure security.
    • Return:

      The investment is being made to earn a return out of it. So, various investments should be considered in a portfolio after comparing the return each one yields. Any return is associated with a level of risk. The investment must be chosen based on optimal risk and return.
    • Maturity period:

      Cash being a current asset does not remain surplus for a long period of time. So, different investment options with varying maturities should be considered. Choosing an investment that has a maturity date equal to a definite cash obligation in future could also be considered.

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