Publish On: 2019-05-20


Total Post: 504

Question: Define cash investing surplus.

Reply On: 2013-06-22


Total Post: 8

ANS: Define cash investing surplus.

There is a close relationship between cash and money market securities or other short-term investment alternatives. Investment in these alternatives should be properly managed. Excess cash should normally be invested in those alternatives that can be conveniently and promptly converted into cash. Cash in excess of the requirement of operating cash balance may be held be two reasons. First, the working capital requirements of the firm fluctuate because of the elements of seasonality and business cycles. The excess cash may build up during slack seasons but it during slack season in idle temporarily, but has a predictable requirement later on. Second, excess cash may be held as a buffer to meet unpredictable financial needs. A firm holds extra cash because cash flows cannot be predicted with certainty. Cash balance held to cover the future exigencies is called the precautionary balance and is usually invested in the short-term money market investments until needed.

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