This paper explores the various cash management practices and short-term investment strategies undertaken by public organisations. It will discuss first cash management practices and then various short term investment strategies. I chose to base my study on Microsoft Corporation.
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Practices & Short-Term Investment Strategies
According to Gibbons (1998), cash management refers to the techniques and practices designed to speed up and control collections, ensure up to time deposit of receipts, improve control over payments and make sure there is no idle cash balance available. “The purpose of cash management is to meet liabilities, which may appear in various forms and circumstances.” (Fabozzi, 2000, p. 1).
Generally, the cash management job involves effective and efficient use of cash available to maximize cash flow at minimum cost. Cash management remains an integral part of organisation’s financial activities and is vital in making financial decisions. Cash includes cash items in the process of collection, currency and balances from deposit institutions, for example, banks.
From my research, I found out that Microsoft Inc. applies five cash management practices.These include delay in payment of liabilities. From analysis of the company’s financial statements, I saw that Microsoft delayed payments of liabilities to ensure that everything was paid on time.
Microsoft has also spent up the collections of its receivables to make sure that all the profits are properly handled in order to facilitate to repeat business. Maintaining a high inventory is very costly for a business and can create problems with cash on hand. Microsoft goes by the EOQ policy of ordering stock to ensure minimal costs.
From Microsoft’s financial statements, there is evidence that the organisation has planned the timing of its major investments. The major investments are usually done at the end of the year when all the dividends are paid off.
Fourth, timing of expenditures is an overall deal within every company as every company’s goals are to grow and be successful, as well as make sure all the operating, investing, and financing activities are properly handled, these are issues that need to be paid very close attention to.
Finally, there is also evidence that Microsoft has been investing in their idle cash to enable the company to build and expand the business in the long run as well as make sure that its cash keeps growing or making profit.
Cash management is a vital process in any organisation, be it a big one or a small one. Companies should ensure that a cash budget is carefully maintained and handled.
In its cash management strategies, Microsoft invests in short-term investment strategies. Short-term investment strategies are a great way of saving money that will be easily accessible, when needed. According to Irving Fisher (2007), many options are available to business for short-term investments. They involve putting money into funds with a low risk factor attached to them
Microsoft invests in money market funds as one of its short-term investment strategies. Money markets allow the company to begin earning on the investments, and still they do not tie the money for a long time. Money markets are also secure and safe. In addition, money market funds provide flexibility with their liquidity since they can be sold at anytime at their current share price, and also the yield on a money market is competitive.
Microsoft also invests on low risk funds. Low risk stock funds are one of the viable options for short-term investments
Microsoft also puts up its money in bonds and bond funds. Although the payout is not spectacular, the funds are safe and steady. With individual bonds, the company makes the selection of the bonds itself, whereas with a bond fund, someone else does all of the work.
Microsoft has also created a laddered portfolio. This helps in safeguarding against fluctuations in interest rates. A portfolio refers to a collection of investments, mainly securities from different industries. This protects the company from risks.
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Short-term investment choices are quite different and numerous. Good investment strategy helps the company realize a good return on its money.
Gibbons, F. (1998). Cash Management Practices. New York: Sage.
Fabozzi, F.J. (2000). Cash Management: Products and Strategies. New York: John Wiley & Sons
Fisher, I. (2007).The Nature of Capital and Income. New York: Cosimo, Inc.