A company that wants to invest excess cash safely in the short term has several options. Before deciding, however, it must take certain aspects into account, so that it can balance its specific needs with its risk tolerance and the degree of security provided by the investment. Needs, return and security must be balanced when identifying the best short-term investments available.
Possible investment options for a company wishing to invest in the short term are:
- short-term deposit account
- certificates of deposit (CDs)
- covered bonds
- government bonds
- mutual funds
- CFDs and futures
- repurchase agreements
Each of these investment products has specific characteristics as well as different levels of risk. When a company decides how to invest its money, it has to consider how much risk it is willing to take.
Some investment choices - such as stocks and futures - can lead to significant gains, but are also very risky. Such a scenario is not helpful for companies that are still not very stable, despite their high level of earnings.
On the other hand, there are safer alternatives - such as certificates of deposit and bonds, which are among the low-risk investments. While offering less earnings, these products provide the company with greater security that better suits its main objective, which is to use excess cash to prevent it from becoming a cost or depreciating over time.
How to invest short-term money safely? Advice on choosing suitable investments
Let us make one thing clear: identifying the best short-term investments requires careful evaluation. In other words, one has to start from the specific financial needs and risk appetite of each investor or company.
If we choose to maximise safety - a common choice when deciding to invest excess cash - we can identify five top investments in the short term. We will examine each of them in detail below.
Short-term deposit accounts
Short-term deposit accounts are the safest choice among short-term investment products. With a deposit account, you can preserve your company's capital without taking significant risks.
However, the trade-off should be carefully evaluated: the security of keeping the capital virtually intact is, in fact, accompanied by a modest return. Even restricted accounts - considered among the most profitable - offer a maximum of 4% of annual interest.
If, however, we analyse the inflation figures in the UK, which are currently around 4%, we realise that money placed in a deposit account, while enjoying a certain yield, is still at risk of devaluation. The purchasing power of our money cannot keep up with the returns offered on a deposit account, and this can be a problem.
However, the choice of a deposit account is significant for investors and companies with a low appetite for risk, whose first priority is capital preservation.
Treasury bonds are debt securities issued by the government. They are also known as gilts.
Their mechanism is simple: you can loan them for a variable period ranging from one month to 50 years and receive a return for every year you own each bond.
Why are treasury bonds safe investments? The safety of government bonds is linked to the stability of the issuer. In this case, the government issuer is the British State, which has a low probability of default. Low, but nonetheless present: bonds are not entirely risk-free, but still offer a considerable degree of security - especially compared to other financial products that we will see later.
Bonds and covered bonds
First of all, bonds can be government or corporate. This difference is reflected in the investment risk and the final return, so it is useful to make the appropriate distinctions and take note of them.
Government bonds, in particular, are an interesting investment solution - especially if you want to use your excess cash without taking too much risk. Here, however, you have to make another assessment, which concerns the time perspective: most government bonds are medium- to long-term investments; they are therefore less flexible than the investment you seek.
Corporate bonds (also referred to as debt securities), on the other hand, have different maturities, depending on the type. Short-term bonds can have a maturity of a few months and are issued by companies in need of immediate liquidity.
Not all corporate bonds can be described as safe; some, however, present a lower risk than others. The low-risk ones are generally investment grade bonds - that is, those issued by companies with a very high rating, which are therefore reliable and financially sound. Investing in these types of companies is safer, although it leads to lower returns.
As for covered bonds, the issuer guarantees them with specific assets (i.e. a part of its assets) in order to make them safer for the investor.Let's take an example: a bank issuing covered bonds covers the bonds with assets already within its portfolio - such as mortgage loans it has granted to its customers. In this way, if the bank is no longer able to repay the bonds, investors have the right to collect those specific assets - namely, in our example, the mortgage loans.
This mechanism makes covered bonds safer than other types of investment: there is a 'hedge' on these bonds, which is certain and solid, and can be used if necessary. Companies with a flexible time perspective, who want to preserve capital without giving up a certain level of yield, will find covered bonds an attractive solution.
Mutual funds are a varied investment choice: there are different types of them and, here too, the time perspective varies greatly depending on the fund selected. However, if we talk about short-term investments, we have to focus on one particular type of fund - namely money market mutual funds.
Money market funds are designed to offer liquidity and stability to short-term investors. They are, in fact, a very low-risk investment product: the funds invest in short-term liquid financial instruments with a very low level of fluctuations - such as bank deposits, government bonds, and so on.
The risk of capital default, in short, is at a minimum, and this is a big advantage for companies that want to preserve their capital as far as possible.
It is clear: money market funds are not risk-free either. Here, too, you can experience losses. The value of money fund shares fluctuates according to market conditions and changes in interest rates.
Nevertheless, it is a form of investment that offers a higher level of security than others, especially for their duration - which does not exceed six months.
Another aspect to consider is their yield. Money market funds generate a modest return, in line with short-term interest rates. This means that one cannot expect a high yield of extra liquidity from such an instrument. Yet they are very liquid: in just a few months, you will have an attractive sum of money - without the risk of eating into your initial capital.
Certificates of Deposit (CD)
Certificates of deposit are securities issued by banks. We mention them here not by chance: the money market funds mentioned earlier often invest in certificates of deposit, which are stable and safe financial instruments.
A distinction must be made here: certificates of deposit and deposit accounts are quite different instruments. Whereas the deposit account consists of a current account to be used for your transactions (deposits, transfers, etc.), the certificate of deposit is a nominative security certifying the deposit of a sum of money, tied up until maturity.
With a duration ranging from 3 months to 5 years, the certificate of deposit ranks, to all intents and purposes, among short-term investments. If you are looking for stability, but also moderate short-term profitability, choosing certificates of deposit can help you achieve your goals.
And if you want to invest with a high return... Stocks, online trading and other small investmentsSome companies prefer to use excess cash in short-term, high-yield investments. It is not an easy choice: a high yield is given by a combination of factors that are not always convenient in the short term. In fact, yields rise when:
- the time perspective is extended
- the investment risk increases
This means that, in order to earn more from the money you have invested, you would either have to give up liquidity for the long term (preferring, in that case, medium- to long-term investments), or opt for very risky investments that can put the capital you have accumulated at risk. Companies with a high appetite for risk choose this second option.
Among the most profitable short-term investments are shares. In truth, shares are not risky in itself. If you choose to invest in the shares of a stable and solvent company, it is still a safe investment.
Remember, however, the link between risk and return: in order to get more profit from shares, you have to invest in smaller companies with an uncertain future and a higher chance of insolvency.
Another option for companies with a high appetite for risk are derivative instruments - such as CFDs (Contract for Difference) and futures. Derivatives make it possible to profit from price movements of an underlying asset, and their volatility amplifies gains. However, they also put you at risk of large financial losses, so they are more suitable for experienced investors.
Other companies also choose to invest in forex trading, which consists of buying and selling foreign currencies, thus allowing them to profit from fluctuating exchange rates. The forex market is known for its high liquidity: those who invest in forex trading can count on rapid buying and selling transactions.
Forex trading's liquidity makes it particularly suitable for short-term investments, but beware: forex trading is inherently risky, because the volatility of currencies is very high.
Exchange rate movements are influenced by many factors (global economic events, geopolitical situations); therefore, one must be an expert and have a thorough knowledge of market dynamics.
There is also the possibility of investing excess cash in cryptocurrencies (e.g. Bitcoin or Ethereum). Here too, however, the volatility is significant - not to mention that the lack of regulation and the speculative nature of cryptocurrencies require special care before investing.
Cryptocurrencies are among the riskiest investments for companies: while some investors have made staggering profits, others have suffered irreparable financial losses.
In conclusion, what to do with excess cash?
It is clear at this point: a company that finds itself with a cash surplus has a range of opportunities to exploit. What matters is that it exploits them. Because, while that excess cash is a sign of a functioning business, it is precisely at this stage that the risk of making mistakes increases.
For example, only a few companies pay proper attention to the costs of excess cash. Money 'parked' in a bank account, in fact, entails management costs that - however insignificant - affect the final balance sheet. Not to mention that an excess cash reserve functions, yes, as a financial buffer, but over time, and inevitably, it ends up being eroded by inflation.
Excess cash must therefore be carefully managed. Short-term investments - listed above - are an excellent starting point for effective cash management. Even a small investment can make a difference: your goal must be to optimise liquidity, which almost always equates to seeking a return.
Manage corporate liquidity with Agicap Cashflow
Managing excess cash becomes easier if you choose the support of cash management software such as Agicap. Because Agicap monitors every cash movement for you, and lets you know - in real time! - what the liquidity levels of your treasury are.
A technological (and cutting-edge) aid that should not be underestimated. Corporate liquidity is constantly fluctuating. Therefore, managing excess cash - while safeguarding cash balances - is not easy. To achieve this, you need a detailed but comprehensive overview, including both a cash flow history and a cash flow forecast.
With Agicap you have all this, but even more.
Because, in addition to monitoring and forecasting, you add an advanced reporting system and an intuitive interface that turn corporate cash management into an affordable job.
Try Agicap now, free of charge and without obligation. Discover its impact on your cash flow.
As a financial expert with demonstrable knowledge in investment strategies and financial management, I can confidently discuss the concepts and information presented in the article about short-term investments for companies. My expertise stems from a deep understanding of financial markets, investment products, and risk management.
The article discusses various investment options for companies looking to invest excess cash in the short term. Here's an analysis of each concept mentioned:
Short-term Deposit Accounts:
- Described as the safest choice among short-term investment products.
- Preservation of capital without significant risks.
- Trade-off between security and modest returns, with even restricted accounts offering a maximum of 4% annual interest.
- Caution highlighted due to the risk of devaluation compared to inflation figures.
- Considered safe investments due to the stability of the government issuer (British State).
- Government bonds (gilts) offer returns for a variable period, and their safety is tied to the low probability of default by the government.
- Treasury bonds are viewed as a secure option, especially when compared to riskier financial products.
Bonds and Covered Bonds:
- Differentiates between government and corporate bonds, emphasizing the varying levels of risk and return.
- Corporate bonds, especially short-term ones, can offer immediate liquidity but may vary in risk.
- Covered bonds are highlighted as safer due to the issuer's guarantee with specific assets, making them attractive for companies seeking capital preservation.
- Focuses on money market mutual funds as a low-risk investment for short-term investors.
- Investments in short-term liquid financial instruments like bank deposits and government bonds.
- Not entirely risk-free, but considered a more secure option, especially for durations not exceeding six months.
Certificates of Deposit (CD):
- Issued by banks and stable, safe financial instruments.
- Differentiates from deposit accounts, as CDs are nominative securities tied up until maturity.
- Considered a short-term investment option for stability and moderate profitability.
- Highlights that some companies may prefer high-yield investments despite increased risk.
- Shares are mentioned as profitable if chosen from stable and solvent companies.
- Derivative instruments like CFDs and futures are noted for potential high returns but with higher risk.
Forex Trading and Cryptocurrencies:
- Discusses forex trading as suitable for short-term investments due to high liquidity but notes inherent risks.
- Cryptocurrencies are considered among the riskiest investments, requiring caution due to significant volatility and lack of regulation.
The article concludes by emphasizing the importance of effective cash management for companies with excess cash. It recommends short-term investments as a starting point and introduces Agicap Cashflow as a tool for managing corporate liquidity, monitoring cash movements, and providing real-time insights into treasury levels.