Surplus funds not needed for either operating purposes or compensating bank balances are available for investment. Prudent use of these funds can add to income, though the treasurer must consider a range of investment criteria, types of investments, and investment strategies before selecting the appropriate investment vehicle. This chapter describes these issues, as well as the accounting, controls, policies, and procedures required for an ongoing investment program.
When considering various forms of cash investment, the treasurer should first consider the safety of the principal being invested. It would not do to invest company funds in a risky investment in order to earn extraordinarily high returns if there is a chance that any portion of the principal will be lost. Accordingly, a company policy should limit investments to a specific set of low-risk investment types. Also, some consideration should be given to the maturity and marketability of an investment. For example, if an investment in a block of apartment houses appears to generate a reasonably risk-free return and a good rate of return, it is still a poor investment from a cash management perspective, because the investment probably cannot be converted to cash on short notice. Accordingly, it is best to only make investments where there is a robust market available for their immediate resale. The final consideration when making an investment is its yield—and this is truly ...