Short-term investments are debt or equity securities that a company expects to convert into cash within a short period, usually between three and twelve months. Common examples include treasury bills, commercial paper, certificates of deposit, and highly liquid marketable securities.
Why are Short-Term Investments Important?
Short-term investments are important because they:
Enhance Returns: Earn interest or dividends at rates higher than cash balances without sacrificing liquidity.
Manage Cash Flow: Provide a buffer for meeting short-term obligations and unexpected expenses.
Optimize Treasury Management: Allow companies to put idle cash to work while preserving the ability to access funds quickly.
How are Short-Term Investments Calculated?
On the balance sheet, short-term investments are reported at fair value and calculated as the sum of all qualifying securities expected to mature within the reporting period:
Short-Term Investments = Fair Value of Treasury Bills + Commercial Paper + Certificates of Deposit + Marketable Securities (maturing ≤ 12 months)
Additional Considerations
Valuation: Investments are adjusted each period to reflect changes in fair value; unrealized gains or losses may appear in other comprehensive income.
Risk vs. Return: Shorter maturities reduce interest rate risk but may offer lower yields than longer-term securities.
Classification: Companies must distinguish between trading securities (marked to market) and held-to-maturity securities (carried at amortized cost) under accounting standards.