Cash Management -“Investing Cash Surpluses

Managing cash is not a one way traffic of merely sourcing for funds for the company in a timely and cheapest manner.

It also involves the calculated and systematic way of investing cash surpluses.

It is very important to

  • understand the underlying factors that should be considered when deciding how a company should invest its surplus cash and


  • understand some of common types of investment available.(UK scenario)


So what are the common investments available:

Types Of Common Investments (UK Scenario) to Invest the Cash Surpluses:



Certificates of deposit (CDs)

  • Certificates of deposit are negotiable instruments in bearer form.


  • Title belongs to the holder and can be transferred by delivering the CD to the buyer.

  • Bank and building societies issue CDs.

  • The amount of the deposit and the date of repayment will be stated on the certificate.

  • The deposit amount will usually be at least £100,000 (UK) and the repayment date will be anything from one week to five years.

  • Repayment is obtained by presenting the CD to the issuer on the designated date.

  • Since CDs are negotiable, the holder can sell them at any time. This makes them far more liquid than a money-market time deposit with the same bank.


  • Usually offer an attractive rate of interest and a low credit risk.

  • Useful for investing funds in the short term since can be sold at any time on the secondary market.

Gilt-edged securities (gilts)

  • These are marketable British Government securities.

  • The government issues them to finance its spending, but also uses them to control the money supply.


  • Most gilts have a face value of £100 at which the government promises to buy the gilt back on a specific date in the future.

  • Gilts usually have fixed interest rates, although there are also various index-linked gilts.

  • Where they are the index-linked type, both the interest and the redemption value are linked to inflation, ensuring that a decent real return is gained.

  • Gilts may be ‘Shorts’ (repaid in less than five years), ‘Mediums’ (repaid in five to 15 years), or ‘Longs’ (repaid in more than 15 years).

  • Some of the older gilts, such as 3.5% War Loans, are irredeemable.

  • If a company buys a gilt and holds it until it is repaid by the government, the return received will be fixed from the outset. As the government will not default on the debt and the interest to be earned is known in advance, this makes it a low-risk investment.

  • Gilts are also traded on the stock market. Their price can go up or down, depending on what people think will happen to interest rates.

  • When interest rates are expected to fall, the price of the gilt rises, and when interest rates are expected to rise, the gilt price falls. Using gilts in this way makes them a more risky investment, but still relatively safe when compared with other types of investments.

  • Gilts are transferable on the secondary market in multiples of a penny, but if they are bought from new, the minimum investment is £1,000.


  • There is no maximum investment limit.

  • They are easy to transfer and the title can even be passed electronically.

  • Gilts are a good choice of investment for risk-averse investors.

High street bank deposits

All of the high street banks offer different types of interest-earning accounts into which an investor could transfer some of its surplus funds.


Sight deposits and time deposits

There are two types of deposits-


1.   ‘sight deposits’, which give instant access to cash, and

2.  ‘time deposits’, which require notice to be given before cash can be withdrawn. Time deposits will always offer higher interest rates because of the restriction it places on the customer.

High interest accounts

When investors have a large amount of money to invest, they can place the money in a high interest account. These usually give instant access to funds.

Option deposits

  • Banks also offer ‘option deposits’ to customers.

  • Option deposits are arrangements for set periods of investment, ranging from two years to seven years.

  • Interest rates are generally linked to base rates, giving a guaranteed return in real terms.

  • Restricted access to funds is the price paid for higher guaranteed interest rates. As an investor, we need to be sure of our cash position for the next two years before considering investing in an option deposit account.


Bills of exchange

  • A bill of exchange is an unconditional order in writing to pay money.

  • There are two types of bills of exchange:

        sight bills – whereby the money is payable on demand

        term bills – whereby the money is payable at a future date. The maturity of term bills can vary from two weeks to six months. Their maximum value is £500,000 and they can be denominated in any currency.

  • The ‘drawee’ is the party liable to pay the money. The ‘payee’ is the person who receives the money. Banks and non-banking institutions are the main buyers of bills on the secondary market. The buyer makes a profit by purchasing the bill at a discount to its face value, then receiving the full value at maturity, or reselling it before this time.

  • The level of risk attached to bills depends on the credit quality of the drawer. If the drawer is a large company or institution, the risk will be lower than if the drawer is relatively small and unknown.


  • There are two main types of shares/equity-


ordinary shares and


preference shares.

Ordinary shares are

        issued to the owners of a company. These shareholders have the right to participate in the running of the company through voting.

  • They also share in the profits of the company through increases in the market value of their shares and through the receipt of dividends.

  • Ordinary shareholders have no right to be paid dividends.

  • In addition, should the company run into financial difficulties, ordinary shareholders are the last group of people to be paid back from the sale of the company’s assets.

  • In practice, this means that the capital they invested in the company will usually be lost.

  • Ordinary shares are therefore a high-risk investment.

  • Risk-averse investors should not purchase ordinary shares.

Preference shares are

  • shares that have a fixed percentage dividend that is payable in priority to any ordinary dividend.

  • Preference shareholders will be paid in priority to ordinary shareholders on dissolution of the company.

  • Preference shareholders do not participate in the affairs of the company in the same way as ordinary shareholders since they do not have the same voting rights.

  • While the income from preference shares is more secure than the income from ordinary shares, the capital is still high risk.

  • Even preference shares are not a good choice of investment for risk-averse investors.




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