Cash Equivalents

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. There is an adage which says cash is king and when it comes to business this adage holds very true as the business cannot survive and thrive without cash. Cash, as we all know, refers to currency notes and coins but in business or accounting, there is another term which is called cash equivalents, cash equivalents as the name suggests refers to those assets which are equal to cash as they can be easily converted into cash at any given point of time. In case of individuals or household gold and silver ornaments are cash equivalents but in case of company cash equivalents are different, given below are the examples of cash equivalents –

  1. Treasury Bills – They are also considered as cash equivalents because these are issued by the government and they are actively traded in the debt market and hence company can sell treasury bills at any point of time in order to get cash from the market and that is the reason why they also fall under cash equivalents.
  2. Money Market Funds – Money market funds is a mutual fund which primarily invests in debt securities which are of high quality but earn the lower rate of interest and that is the reason why they are very liquid and forms part of cash equivalents.
  3. Commercial Paper – Commercial paper are short term unsecured loans which are issued by companies which have the high credit rating and that is the reason why they are considered very safe for investment which makes them part of the cash equivalent.
  4. Short term Government bonds – Short-term government bonds are securities which are issued by central or state governments having short-term maturities and since they are issued by the government they are also called as cash equivalents.
  5. Blue chip stocks – All listed blue chip companies are marketable securities because the company which owns these stocks can have the cash by selling this stocks at any point in time as they are very actively traded in the stock market. However, if the market is down then the company will have to sell these securities in the loss and that is the reason why in times of bear market they cannot be considered as cash equivalents.

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.

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