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.
In practice
Real-world examples.
Example
A tech startup sets aside 50,000 pounds of surplus seed funding in a 90-day government treasury bill, earning a modest return while waiting to hire new software developers.
Example
A retail SME puts 30,000 pounds of summer sales revenue into a money market fund, generating small interest payments until it is needed to buy autumn inventory in October.
Example
A manufacturing firm holds 100,000 pounds in commercial paper issued by a stable blue-chip corporation, securing a predictable short-term yield before paying annual taxes.
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 pounds in cash, 30,000 pounds in short-term investments, 40,000 pounds in inventory, 10,000 pounds in receivables, and 50,000 pounds in current liabilities, the calculation is:
(20,000 + 30,000 + 40,000 + 10,000) - 50,000 = 100,000 - 50,000 = 50,000 pounds working capital.Case study
Seen in the real world.
Brighton Bakery experienced a highly profitable summer, leaving the business with an unexpected cash surplus of 80,000 pounds 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 pounds into a low-risk, three-month money market fund. Over the next six months, the fund generated 900 pounds 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.
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.
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