The previous chapter described the importance of the collections, concentration, and disbursement policies in allowing the treasury department to determine the firm’s current liquidity position. Once the liquidity position is known, treasury personnel can determine whether the firm has either excess cash available or a cash deficit.

This chapter begins with key issues related to short-term investing. Since the short-term investment portfolio consists of excess cash that the firm may require for future liquidity management purposes, most treasury professionals focus on the preservation of principal and access to liquidity, as opposed to seeking higher yields by taking on more risk. For these reasons, the vast majority of the short-term investment portfolio will consist of money market securities with a maturity of one year or less.

Next, the chapter describes topics that are pertinent to short-term borrowing, which may be required when the firm has a cash deficit. Specifically, the characteristics of several short-term borrowing instruments are covered, as well as the calculations involved in determining the effective borrowing cost for lines of credit and commercial paper. The chapter closes with a discussion of the information available to treasury professionals to support good decision making, including credit ratings and the agencies that provide them.