Page 377 - F1 Integrated Workbook STUDENT 2018

Short term finance and investments

Short term Investments

A business might have surplus cash for a period of time. Surplus cash is usually
temporary and available for several weeks or months. Eventually it will be used to
pay suppliers or settle other liabilities, invest in new noncurrent assets or pay a
dividend.

Money in an operational bank account earns no income, because banks do not pay
interest to businesses for cash in their day-to-day accounts. If a business wishes to
maximise its profits, it should consider using the cash to earn some return in the time
when it is temporarily surplus to requirements.

2.1 Investment criteria

When a business has surplus cash to invest temporarily, it has to decide which
investments to select from the different choices available. There are several criteria
that should be considered when making these choices:

 maturity

 return

 risk

 liquidity

 diversification

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