Question

1. Offer three reasons with full explanation for why it is important for companies to keep a fair portion of their overall asset balance in liquid assets.

2. What are some considerations for companies in choosing which marketable securities to invest idle cash balances?

Answer 1

1. Offer three reasons with full explanation for why it is important for companies to keep a fair portion of their overall asset balance in liquid assets.

Liquidity of Funds: The company should at any point of time, be able to assess its financial position to avoid any cash crunch situations; Any default on this, shall impact the value of the company in a disastrous manner; There is no exception for this.

- Unpredicted requirements: Working Capital Requirement and other unanticipated requirements: Working Capital is the life line for the operations of the company. Meeting this requirement is critically important to keep the operations on track. Any delay in the payments to suppliers or so might impact the delivery of the raw materials and could have significant compounding impact till the end of the working capital life cycle; Hence, liquidity is important to meet these working capital gaps. Also, some times there could be changes in certain statutory laws due to which there could be situations of remittances to be made. These type of unpredicted transactions need to be met and hence a sufficient portion of liquidity is required to be maintained;

- Cash Transactions: Many transactions in today's world do prefer cash-to-cash business. Not every thing could be offered over a credit terms. Hence, a minimum liquid balance need to be maintained by the business to meet these daily requirements.

- Treasury: Any excess liquid is managed by the Treasury to invest in to short or medium or long term investments depending on the requirements of the business; However, there could be certain opportunities which could be envisaged in future for a better investment opportunities. Hence, the Treasury holds liquid to effectively deploy the funds for a more better investment.

2. What are some considerations for companies in choosing which marketable securities to invest idle cash balances?

Marketable securities are those which can be easily liquidated and are maintained for a period less than one year. The investment is made in these securities for two fold - main reason is they are completely liquid in nature and can be divested immediately, second - to earn treasury income at what lo west best one can earn. The risk profiles to invest depends on the nature of the investments and the liquidity requirements of the business.

Marketable securities include Stocks, Bonds, Mutual Funds. Money market instruments, futures, options, and hedge fund investments can also be considered marketable securities. However, the ultimate objective while investing in these securities should be of Liquidity.