Managing Cash Flow

240 Investing, Financing, and Borrowing
DECIDE POLICY ISSUES BEFORE STARTING THE
INVESTMENT PROGRAM.
Among the significant policy issues that should be agreed upon prior to setting
up the short-term investment program for the company’s excess cash are:
• What is the company’s basic short-term investment goal? Examples include
maintaining safety of principal, maximizing earnings, cash availability
(liquidity), minimizing transaction costs, and so on.
• How much risk is the company willing to assume? Are aggressive investment
strategies appropriate or is a more conservative approach that reduces
yields but improves safety and liquidity more acceptable?
• Are there any investment restrictions, limitations, or preferred concentrations?
Can the company invest in any instrument that meets basic criteria, or are
there certain types of investments that should be avoided or emphasized
(e.g., no tobacco or liquor company investments, or only investments in
U. S. government securities).
• Who is responsible for investment activities, and what authority should be given
to that person or persons? This is an organizational concern that addresses
the issues of authority, responsibility, and control.
• What kind of approval and reporting steps should be established? Should a second
level of approval be required for transactions? How frequently and in
what detail should reports on investment activity be prepared?
• What degree of concentration or dispersion should the investment program have?
Should the company concentrate investments in similar types of instruments
such as bank certificates of deposit (CDs) or Treasury bills, or
should it diversify its portfolio by using a variety of available
instruments?
• What type of investment audit programs should be established and who should be
responsible for carrying them out? For a large investment program, formal
audit procedures should be developed with steps for following them. For
smaller investment programs, management needs to make sure adequate
controls exist to ensure that policies are followed.
Investment Opportunities
Once overall investment policy guidelines have been established, the company
can begin to evaluate the alternative investment opportunities that are available.
There are a number of macroeconomic conditions that have a direct impact on the
yield and availability of investment instruments. The level of overall economic
activity in the country (and increasingly around the world) certainly has an
effect—as economic activity grows, the demand for funds tends to increase, which