Surplus & Investment of Surplus

Surplus is, when a business have excess of cash inflows over cash outflows because of large amount of cash generated from operations or sale of fixed assets

Business have to invest surplus funds but it should be kept in mind that the surplus is temporary or permanent. Temporary surplus may be invested until it is ensure that it need not be used in current operations. Permanent surplus should be invested. It should be kept in mind that investment should be profitable and secure.

Objectives of investment of surplus:

As they are assets of company so need to be look after like any other assets.

In time of inflation, value of money effectively fall.

There are some factors that should be consider before investment of surplus

Risk
Liquidity
Maturity
Return
Risk: There is a strong link between risk and return the higher the risk the higher the return and vice versa. High risk can lead to permanent losses that can collapse the company. Shares traded in stock market are consider to be most high risk type of investment

Liquidity: It involves the ability to turn investment into cash immediately. There is also a close link between liquidity and return. A less liquid investment generally provide a higher return and a high liquid investment generally provide a lower return. It is important to consider investments liquidity before investing. If the amount and duration of cash surplus are to be change then highly liquid investment should be taken, if not then less liquid investment should be taken.

Maturity: The length and duration of investment. The longer the maturity the higher the return. A company’s investment should be mature so that surplus cash is available when business needs it.

Return: Income generated by an investment, expressed usually as percentage of amount invested. The whole purpose of investment is to receive a return the rate of return is also an important factor when investing cash surpluses.

Types of Investment:

Shares
Bonds
Debenture stocks
Certificates of deposit (CDS)
Gilt-edged securities
Bills of exchange etc…….