![]() Cash on hand will be invested in near money assets to ensure high liquidity for when the funds are needed. Treasury departments determine the amount of cash needed to meet future financial obligations and will optimize the cash balance to do so.Įxcess cash can be used to make other investments or can be returned to shareholders. Both ratios contrast the amount of assets with the amount of current liabilities to view and compare how liquid a company is.Ĭorporate treasury departments need to optimize their working capital, which involves monitoring a company’s incoming cash and outgoing cash, as well as the current cash balance. Whereas, the current ratio looks at assets with slightly longer nearness, including assets such as inventories that can be converted to cash over a longer period of time. ![]() The quick ratio looks at assets with short nearness, such as cash, cash equivalents, marketable securities, and accounts receivable. It is taken into consideration when analyzing the quick (acid-test) ratio and current ratio of an organization. On the balance sheet, near money shows up in the liquidity analysis of a company within the cash and cash equivalents balance. In corporate treasury, near money is very useful when optimizing cash management for treasury departments of companies and other organizations. In such situations, near money is an appropriate use of funds since investors can be ensured safety and can receive at least the risk-free rate as compensation. The value of near money remains the same in periods of both economic expansions and recessions because of the safety and liquidity of the assets. For example, if they are going to retire soon or are needing a large amount of money to put a child through post-secondary education etc.įurthermore, individuals may simply not be willing to bear any risk and do not want to see their capital decrease with market swings. The risk-free rate is an appropriate compensation since there is very little to no default risk, the holding period is usually short, and liquidity is high.Īn individual may need high liquidity for several reasons. All of which yields approximately the risk-free rate. Individuals with a high requirement for liquidity will hold various near money assets, such as high-yield savings accounts, money market funds, and Treasury bills. Investors with a low ability or low willingness to take risks will allocate a greater proportion of their portfolio to highly liquid assets, such as near money. In wealth management, near money is useful when optimizing portfolios for individual investors based on their risk tolerance levels. Furthermore, the money supply is correlated with interest rates, and both are heavily impacted by quantitative easing policies enacted by various countries. Measuring the money supply level helps economists and central governments to assess the macroenvironment of an economy and influence their monetary policy and fiscal policy decisions since the growth of money supply affects price levels, inflation, and the business cycle.
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