Accounting Best Practices, Fifth Edition

6–11. Utilize an Investment Policy

Sometimes a controller or treasurer implements all of the cash management best practices and experiences a singular increase in cash flows, only to have no idea of what to do with the money. Though it is always tempting to invest the money in some high-yield investment, there may be associated problems with risk or liquidity that make such investment inappropriate. In fact, an improper investment resulting in losses or no chance of short-term liquidity to meet immediate needs may even cost the investment officer his or her job. Consequently, this is an area in which a best practice is needed, not to improve efficiency or profits, but to contain risk.

An appropriate best practice for every company is an investment policy. This is used to define the level of risk a company is willing to tolerate and defines the exact types of investment vehicles to be used (or not used). Such a policy should cover the level of allowable liquidity. For example, the policy may state that all investments must be capable of total liquidation upon notification, or that some proportion of investments must be in this class of liquidity. Thus, the policy could state that 75 percent of all investments must be capable of immediate liquidation (which rules out real estate holdings!), or that any investments over a base level of $50 million can be invested in less-liquid instruments. Generally speaking, the policy should severely restrict the use of any investments that cannot ...