What it means
When a business generates excess cash, leaving it in a standard current account means missing out on potential interest. To put that money to work without locking it away, companies purchase short-term investments, also known as marketable securities.
These typically include government bonds, treasury bills, and money market funds. The primary goal is safety and liquidity rather than high growth, ensuring the money is ready when needed.
On the balance sheet, these assets sit right below cash and cash equivalents. They matter because they give a clear picture of how efficiently a company manages its working capital.
Having a healthy balance of short-term investments shows that management is not letting surplus cash sit idle, yet maintains enough flexibility to handle sudden opportunities or financial obligations. In practice, finance teams review cash flow forecasts to decide how much money can be set aside temporarily.
If a seasonal business knows it will not need a cash reserve for the next six months, it might move that surplus into short-term assets. This generates extra income for the business while maintaining a low-risk profile, protecting the principal amount invested.
Decisions around these investments require balancing yield against risk and accessibility. While they are safer than long-term stocks or property, even short-term financial instruments carry slight market risks or interest rate fluctuations.
Therefore, companies establish clear treasury policies to dictate which specific instruments are acceptable for their surplus funds. Short-term investments are like keeping spare cash in a high-interest savings jar on your kitchen counter rather than locked in a safe deposit box.
You can still grab it quickly if an emergency arises, but it earns a little extra pocket money in the meantime.
In practice
Real-world examples
Example 1
A tech startup sets aside $50,000 of surplus seed funding in a 90-day government treasury bill, earning a modest return while waiting to hire new software developers. When the bill matures, the cash returns to the bank account just as the first salaries fall due.
Example 2
A retail SME puts $30,000 of summer sales revenue into a money market fund, generating small interest payments until it is needed to buy autumn inventory in October. The owner checks the fund balance monthly and redeems exactly what each supplier invoice requires.
Example 3
A manufacturing firm holds $100,000 in commercial paper issued by a stable blue-chip corporation, securing a predictable short-term yield before paying annual taxes. The treasury policy limits how much can sit with any one issuer, which keeps the risk low.
Think of it
Short-term investments are like keeping spare cash in a high-interest savings jar on your kitchen counter rather than locked in a safe deposit box. You can still grab it quickly if an emergency arises, but it earns a little extra pocket money in the meantime.
Formula
Calculation
Total Working Capital = Current Assets (Cash + Short-Term Investments + Inventory + Accounts Receivable) minus Current Liabilities.
Example: If a company has $20,000 in cash, $30,000 in short-term investments, $40,000 in inventory, $10,000 in receivables, and $50,000 in current liabilities, the calculation is:
(20,000 + 30,000 + 40,000 + 10,000) - 50,000 = 100,000 - 50,000 = $50,000 working capital.
To estimate what an investment earns, use: Interest Earned = Amount Invested x Annual Rate x (Months Held / 12). Placing $50,000 in a 3-month treasury bill at an annual rate of 4% earns 50,000 x 4% x (3 / 12) = $500. The money is back in cash after three months, ready for the next bill or expense.Case study
Seen in the real world
This is a fictional, illustrative scenario. Brighton Bakery experienced a highly profitable summer, leaving the business with an unexpected cash surplus of $80,000 in its bank account. The owner, Sarah, knew this money would be needed in six months to pay for a major kitchen refurbishment. Instead of leaving the cash idle, Sarah consulted her accountant and placed $60,000 into a low-risk, three-month money market fund. Over the next six months, the fund generated $900 in interest.
When the time came to pay the refurbishment contractors, Sarah simply redeemed the investment back into cash without incurring any penalties or delays. This strategy allowed Brighton Bakery to boost its annual profit margin slightly with zero disruption to its daily operations. Sarah wrote down a simple rule for next time: only instruments that mature within twelve months, only reputable providers, and always keep $20,000 in the current account for emergencies. She also added a monthly reminder to review the cash forecast before moving any money. The bakery now treats its surplus cash as a managed resource rather than an afterthought.
Watch out
Common mistakes
- Treating long-term shares as short-term investments just because they could theoretically be sold quickly.
- Ignoring the penalty fees or interest loss associated with early redemption of certain financial instruments.
- Leaving too much cash in low-yield accounts instead of moving excess funds into short-term assets.
Questions
People also ask
What is the difference between cash and short-term investments?
Cash is immediately available money in bank accounts, while short-term investments take a few days to convert into cash and usually earn a small amount of interest.
Are short-term investments risky?
They carry very low risk compared to stocks or property, focusing mainly on capital preservation and liquidity rather than high financial growth.
How long do these investments typically last?
They usually mature or can be sold within a few weeks to twelve months.