Cash is one thing which every company would love to have in its balance sheet because having excess cash helps the company in making profitable investments and avoiding any embarrassment related to nonpayment of dues to its creditors. However companies would be also happy if they do not have cash but have cash equivalents.
Cash equivalents are those short term investments of the company which are highly liquid and can converted into cash in short period of time usually within 3 to 15 days. Some examples of cash equivalents are the treasury bills. Commercial paper, money in the saving account, investments of the company in money market mutual funds etc….
Cash equivalents apart from helping the company whenever the need for cash arises, they also provide returns in terms of interest received to the company as they are interest giving securities. Cash equivalents have virtually no risk because these investments are into government securities or those corporate securities which are of highest rating and therefore companies tend to have cash equivalents in their balance sheet because cash equivalents are as good as having cash.