Idle cash held by a company earns no return and during inflation actually declines in purchasing power. Nevertheless, proper cash management must ensure that enough cash is available to meet a company's day-to-day cash needs. Such cash needs tend to fluctuate, sometimes unexpectedly, making it difficult for management to consistently strike an appropriate balance between available cash and return-producing investments. In an effort to both earn a return and be able to produce cash on short notice, companies often purchase readily marketable securities. Companies also use these investments to offset the risks of changing interest rates associated with certain liabilities. The annual report of Intel, for example, notes, “The company maintains its short-term investment portfolio to offset change in certain liabilities.” Such investments, which include stocks and bonds traded on public security exchanges, provide income through dividends, interest, or price appreciation and can be readily converted to cash when needed to meet current cash requirements.1

The relative size of short-term investments on the balance sheet varies significantly across companies in different industries. Retailers such as hardware, department, clothing, and sporting goods stores typically maintain dollar amounts of less than 3 percent of total assets. Financial institutions, insurance companies, and some services, on the other hand, which have greater needs for ready ...

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