Introduction to Cash Management in Companies
Companies and other economic entities often handle temporary cash surpluses due to the treasury cycle’s nature. This cycle requires extensive planning for periods of cash recovery from sales or service provision and payment deadlines to employees, suppliers, creditors, and loans.
The Role of Collection and Supplier Payment Planning
Cash management is crucial in the treasury cycle, as the responsible party must ensure timely customer payments within agreed-upon terms. Simultaneously, negotiating payment deadlines with suppliers is essential to minimize external financing costs based on market characteristics and trends.
Achieving a Healthy Cash Cycle
Once a reasonably healthy cash cycle is established, the focus shifts to making the money productive within the company during the anticipated application period.
Investing Excess Cash
During this period, company management must invest the excess cash in various instruments based on their risk appetite. These instruments range from low-risk, low-yield bank deposits to high-risk, high-yield stocks and foreign currencies.
Types of Investment Instruments
- Bank Deposits: Offer predefined, low-risk returns.
- Government Bonds: Provide slightly higher yields with varying maturities.
- Market Debt Instruments: Include fixed or variable-rate bonds with moderate risk.
- Stocks: Yields depend on market performance.
- Foreign Currencies: Offer diversification opportunities.
- Cryptocurrencies: Present high-risk, potentially high-reward options.
Considering Investment Duration
Investment decisions should consider the duration, as cash availability depends on company needs. Instruments range from one-day overnight bonds for large cash amounts to stocks with indefinite terms.
Balancing Risk and Return
As investment returns increase, so does the risk of potential losses. Instruments tied to specific market supply and demand dynamics may offer attractive yields but are also susceptible to value fluctuations based on issuer factors or broader market and economic conditions.
Seeking Expert Advice
Regardless of management’s preparedness, seeking expert advice is crucial when investing in financial markets. Experts monitor factors affecting investments, allowing management to focus on company operations.
Key Questions and Answers
- Why do companies need to manage their cash? Companies must plan for cash recovery periods and payment deadlines, ensuring a healthy treasury cycle.
- What are the common investment instruments for businesses? These include bank deposits, government bonds, market debt instruments, stocks, foreign currencies, and cryptocurrencies.
- How does investment duration impact decisions? Investment duration should align with the company’s cash needs, ranging from short-term overnight bonds to long-term stock investments.
- What are the risks associated with investment returns? Higher-yielding investments often carry greater risk, including market supply and demand fluctuations and broader economic factors.
- Why is expert advice important for financial investments? Experts monitor investment-affecting factors, enabling company management to focus on operations.
