From a strategic corporate finance point of view, ideally/theoretically, companies should retain only the cash they need to run their businesses and fund future capex and growth endeavors.
Nonetheless, often companies see themselves with surplus cash in their balance sheet.
Although any company can decide otherwise, the norm is for the companies to invest such surplus cash in financial instruments that have low-risk, have short-terms and are highly liquid (convertible in cash within a few hours or days), such as short-term deposits, treasury bills, and money market funds.
These instruments are usually considered "cash equivalents", and will fall in the same section as cash in the balance sheet, namely in "cash and cash equivalents".
A template for a Cash Investment Policy
1 - Objective:
The objective of this cash investment policy is to prudently manage the company's short-term cash reserves by preserving capital, maintaining liquidity, and generating a reasonable return in accordance with applicable laws and regulations.
2 - Guiding Principles:
a. Safety: Preservation of capital is of utmost importance. Investments should prioritize principal protection and minimize the risk of loss.
b. Liquidity: Investments should be highly liquid to ensure availability of funds for operational needs and unforeseen contingencies.
c. Return on Investment: Investments should aim to generate a modest return while considering the primary objectives of capital preservation and liquidity. The primary focus is on capital preservation rather than aggressive yield maximization.
d. Risk Management: Investments should be subject to careful risk assessment and adhere to the company's risk tolerance levels. Investments in low-risk instruments should be favored, minimizing exposure to credit, market, and liquidity risks.
3 - Authorized Investments:
a. Money Market Funds: Investments may be made in money market funds that have a primary objective of maintaining stability of principal value, high credit quality, and liquidity.
b. Treasury Bills and Short-Term Government Securities: Investments may be made in treasury bills or short-term government securities issued by creditworthy governments or government agencies.
c. Certificates of Deposit (CDs) and Bank Deposits: Investments may be made in CDs or bank deposits with reputable financial institutions, subject to adequate FDIC or equivalent deposit insurance coverage.
4 - Investment Guidelines:
a. Diversification: Investments should be diversified across multiple issuers, instruments, and maturities to reduce concentration risk.
b. Investment Maturity: Investments should generally be limited to maturities of less than [insert maximum maturity period], prioritizing shorter maturities to maintain liquidity.
c. Credit Quality: Investments should be made in instruments with a high credit rating from recognized credit rating agencies.
d. Monitoring and Review: Investments should be regularly monitored to ensure compliance with this policy. Periodic reviews should be conducted to assess investment performance, risks, and adherence to guidelines.
5 - Roles and Responsibilities:
a. [Insert Name/Title]: Responsible for overall oversight and compliance of the cash investment policy.
b. [Insert Name/Title]: Responsible for executing investment transactions in accordance with the policy and providing regular reports on investment performance.
c. [Insert Name/Title]: Responsible for monitoring and reviewing investment activity and ensuring compliance with the policy.
6 - Reporting and Evaluation:
a. Regular reporting on investment performance, including returns, risks, and compliance with the policy, should be provided to [relevant stakeholders, e.g., executive management, board of directors].
b. The cash investment policy should be subject to periodic review, at least [insert frequency], to ensure its continued effectiveness and alignment with the company's objectives and regulatory requirements.
7 - Compliance and Review:
a. Compliance with applicable laws, regulations, and internal policies should be maintained throughout the implementation of this policy.
b. This cash investment policy should be reviewed and approved by [insert relevant approving authority] on an ongoing basis.
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