19: Cash, Payables and Liquidity ManagementSafety Motive
The safety motive, sometimes called the precautionary motive, for holding cash and short-term investments
exists to protect the company against being unable to satisfy unexpected demands for cash. This motive
is fulfilled by maintaining a pool of liquid funds that can quickly be accessed in an emergency. Generally
the company will hold highly liquid short-term investments that can immediately be converted into cash.
Speculative Motive
Companies sometimes hold cash and short-term investments for speculative reasons. This speculative
motive exists because the company has no other use for certain funds, or because it wants to be able to
take advantage quickly of opportunities that may arise. Typically, this motive is pursued only after the
company meets its safety motive. Funds held for speculative reasons are often invested in short-term as
well as long-term instruments.
19- 4b SHORT-TERM INVESTING
Making sure that the company has access to liquid assets when and where they are needed is one of the
critical tasks for the cash manager. Although the primary form of liquidity will generally be a company’s
cheque or demand deposit accounts at its banks, these accounts usually do not earn interest, and the
company should not hold excess balances in them. To earn some type of short-term return, a company will
hold some near-cash assets in the form of short-term investments, often labelled marketable securities. These
investments may be either a source of reserve liquidity or a place to maintain temporary surplus funds.^2
Because such short-term investments are essentially a substitute for cash, providing liquidity and preserving
principal should be the primary concerns. Earning a competitive return is also a consideration; however, care
must be taken not to place the underlying principal at risk. Remember that the primary purpose of short-
term investments is to maintain a pool of liquid assets as a substitute for cash, not to generate profits for the
company. Toward this end, it is important that a company establish policies and guidelines for the management
of short-term investments; these should clearly specify the purpose of the investment portfolio and provide
recommendations and/or restrictions on acceptable investments and the amount of diversification.
Money Market Mutual Funds
Many large companies will manage their own portfolios of short-term investments, but most companies
(especially small ones) use money market mutual funds as an alternative. Originating in the US in the
1970s, money market mutual funds are professionally managed portfolios that invest in the same types of
short-term instruments in which cash managers invest. They are now widely used in developed banking
systems. They may, in fact, offer even more flexibility and stability than a self-managed fund. Using these
types of funds can make sense, especially when the costs of running and managing a short-term portfolio
are considered.
In most cases, these funds set their net asset value (N AV) at a fixed $1 per share in order to preserve
the principal value of the fund. As the value of the fund increases, the fund pays investors in additional
shares rather than allowing the share price to increase. Commercial money market mutual funds are
available from independent companies as well as from most large banks.
2 Temporary surplus funds may result from ongoing operations, seasonal performance, sales of large assets or proceeds from a large securities
issue.
safety motive
A motive for holding cash and
short-term investments in
order to protect the company
against being unable to satisfy
unexpected demands for
cash. Sometimes called the
precautionary motive
speculative motive
A motive for holding, typically
in short-term as well as long-
term investments, funds that
are currently unneeded or can
be used to take advantage
quickly of opportunities that
may arisemoney market mutual
funds
Professionally managed short-
term investment portfolios
used by many small companies
and some large companies