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Working capital management – Cash and funding strategies

Short-term investment and borrowing

solutions

4.1 Short-term cash investments

These are used for temporary cash surpluses.

To weigh up an investment a company has to weigh up three potentially conflicting
objectives and the factors surrounding them.

 liquidity – the cash must be available for use when needed as the surplus is
only short-term

 safety – no risk of loss must be taken as once the surplus period is over the
investment must be converted back into enough cash to meet the business
needs

 profitability – subject to the above, the aim is to earn the highest possible after-
tax returns

4.2 Short-term borrowing

There are two main sources of bank lending:

 bank overdraft

– flexible and cheap as only used when needed

– but repayable on demand, may require security and interest rates can
change

 bank loans

– less flexible and more expensive as paying for a fixed period even if cash
balances recover

– but more secure

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