Short-term Investment Decision is also known as ____a)Working capitalb)Dividend Decisionc)Capital Budgetingd)None of theseCorrect answer is option 'A'. Can you explain this answer?

Question

Answer

Working capital is a measure of both a company's operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt.

Answer

Working capital is a measure of both a company's operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt.

Answer

Short-term Investment Decision is also known as Working Capital

Working capital refers to the funds that a business requires to carry out its day-to-day operations effectively. It represents the difference between a company's current assets and its current liabilities. Short-term investment decision is a part of working capital management and involves determining how to invest excess cash or idle funds for short periods of time, typically less than a year.

Importance of Short-term Investment Decision
- Optimal utilization of funds: By making wise short-term investment decisions, a company can ensure that its idle cash is invested in low-risk and high-return avenues, thereby maximizing the return on investment.
- Liquidity management: Short-term investments can be easily converted into cash whenever required to meet short-term obligations or unexpected expenses. It helps in maintaining a sufficient level of liquidity to cover the day-to-day operational needs of the business.
- Risk management: By diversifying short-term investments across various low-risk avenues such as money market funds, treasury bills, or short-term bonds, a company can minimize the risk of loss and earn a steady stream of income.
- Capital preservation: Short-term investments are made with the objective of preserving the principal amount while generating a reasonable return. These investments are usually less volatile compared to long-term investments, reducing the risk of capital erosion.

Key Considerations in Short-term Investment Decision
- Investment horizon: Short-term investments typically have a maturity period of less than a year. The investment decision should align with the company's cash flow requirements and the duration for which the funds can be invested.
- Risk tolerance: The risk appetite of the company should be taken into account while making short-term investment decisions. Investments with higher returns often come with higher risks, and it is important to strike a balance between risk and return.
- Liquidity: Short-term investments should be highly liquid, allowing the company to access the funds quickly whenever required. They should be easily convertible into cash without incurring substantial penalties or transaction costs.

Conclusion
Short-term investment decision, also known as working capital management, plays a crucial role in ensuring the efficient utilization of funds and maintaining adequate liquidity for a business. By making prudent investment decisions, companies can generate additional income, preserve capital, and mitigate risk.

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