Short-Term Investment and Treasury Management

A forecast says there will be ₦150m more cash than the business needs for the next three months. Leaving it in a current account that pays almost nothing is wasteful; putting it into something that cannot be sold when the payroll falls due is dangerous.

The second part of cash management is therefore choosing where to put temporary surpluses so that they earn something, can be turned back into cash and carry little risk. And when a group has many companies with their own bank accounts, some in surplus and some borrowing at high cost, there is a larger question about who manages the cash, which is the question of treasury management.

This topic covers the causes and handling of temporary surpluses, the three factors in choosing an investment (liquidity, safety and profitability), the main short-term investment options with a comparison of returns, what a treasury department does, and the benefits of centralising treasury, with a numerical example of netting group surpluses and deficits. The next topic covers the Baumol and Miller-Orr cash management models.

The Treasury bills and certificates of deposit used here were described in the money market topic. Read cash flow forecasts and reasons for holding cash first.

Investing a temporary surplus

A cash surplus arises when an organisation has cash it does not need immediately for its operations. It is wasteful to hold it in a bank account that pays little or no interest, so every entity should plan to invest identified surpluses. Because surpluses are usually temporary, they are invested short term. The factors in the decision are:

• Liquidity: the investment must be easily and quickly convertible to cash at a fair price.
• Safety: the risk must be acceptable, with little or no risk of loss.
• Profitability: the highest return achievable while balancing liquidity and safety.

The options

• Savings accounts and interest-bearing deposits at banks.
• Money market investments. A Treasury bill is a short-term government debt security with a maturity from a few weeks to a year, used by governments to finance short-term spending and regarded as low risk. A certificate of deposit is a bank deposit with a fixed rate and maturity date, which tends to be low risk and pays a little more than a savings account in return for locking the money up for the term. It can be sold before maturity.
• Short-dated government bonds, with less than five years to maturity, which are attractive as short-term investments when they are close to maturity.

Example: a company has ₦150m to invest for 90 days. A bank deposit at 8% pays ₦150m × 8% × 90 ÷ 365 = ₦2.96m. A certificate of deposit at 9.2% pays ₦150m × 9.2% × 90 ÷ 365 = ₦3.40m. A 91-day Treasury bill bought at 97.50 per ₦100 turns ₦150m into a face value of ₦150m ÷ 0.975 = ₦153.85m, so the interest is ₦3.85m, an annual return of (3.846 ÷ 150) × (365 ÷ 91) = 10.3%.

The highest return is on the bill, which is also tradable and carries government risk only, so on these figures it is the best choice, although a bill that cannot be sold at a fair price when needed would be less liquid than a deposit.

Treasury management

Treasury management is the management of an organisation’s financial resources, including cash, investments and funding. Its aims are to optimise liquidity, minimise risk and maximise returns. The central treasury department makes sure that cash is available in the right amounts, at the right time and in the right place. Its functions include:

• Cash management: managing inflows and outflows and forecasting cash needs.
• Funding and financing: arranging loans and credit facilities.
• Investment management: investing surplus funds.
• Risk management: identifying and reducing financial risks such as interest rate and exchange rate risk.
• Banking relationships: managing relationships with banks and other institutions.
• Planning and forecasting: providing financial forecasts for business decisions.
• Liquidity management: ensuring enough liquidity to meet obligations.
• Payments and settlement: managing payment processes and transactions.

Centralised treasury

Centralised treasury management concentrates treasury functions and decisions in one team, usually at head office. The benefits are:

• Improved control over cash, risk and investments.
• Increased efficiency: streamlined processes and less duplication.
• Better risk management: consolidated hedging and mitigation.
• Optimised liquidity: less idle cash and better funding.
• Enhanced visibility: consolidated reporting and informed decisions.
• Cost savings: lower bank fees, stronger negotiating power and cheaper funding.
• Standardisation of policies, procedures and systems.

The clearest gain is the netting of group balances. Three subsidiaries each manage their own cash. Subsidiary A has ₦40m in surplus earning 5%, B has a deficit of ₦30m on overdraft at 15% and C a deficit of ₦10m on overdraft at 15%. Separately, the group earns ₦2.0m (5% of ₦40m) and pays ₦4.5m and ₦1.5m, a net cost of ₦4.0m.

If treasury pools the balances, A’s ₦40m covers B and C exactly (40 − 30 − 10 = 0), the group needs no overdraft and the net interest is nil, a saving of ₦4.0m a year.

The ideas in more depth

Why liquidity and safety come before yield

The money invested will be needed back on a known or uncertain date. If it cannot be sold quickly, or it falls in value, the company may have to borrow expensively to pay its bills, which cancels the extra return. A small extra yield on an illiquid or risky asset is rarely worth the risk for operating cash.

Why centralising can also cause problems

A single treasury may be remote from local businesses, slow to respond to local needs and exposed to one set of mistakes. Cross-border groups must also respect exchange controls and tax rules on moving cash between countries. The benefits are greatest when the treasury has good information and clear policies.

Sources and references

• No accounting standard governs treasury policy. Short-term investments are measured under International Financial Reporting Standard (IFRS) 9 Financial Instruments and cash equivalents are defined in International Accounting Standard (IAS) 7 Statement of Cash Flows.

These points are stated as at 5 November 2026.

Worked examples

1. Interest.
   ₦150m × 8% × 90 ÷ 365 = ₦2.96m.

1. Face value.
   ₦150m ÷ 0.975 = ₦153.85m, so interest ₦3.85m.
2. Annual.
   (3.846 ÷ 150) × (365 ÷ 91) = 10.3%.

1. Separately.
   −2.0 + 4.5 + 1.5 = net cost ₦4.0m.
2. Pooled.
   40 − 30 − 10 = 0, so no interest: saving ₦4.0m.

How to answer in the exam

• State the three criteria and apply them to each option in the scenario.
• Calculate the return on the same basis (annual) for each option before recommending.
• For treasury, list the functions and the benefits, and quantify netting where figures are given.
• Add the limits: remoteness, local needs, legal restrictions on moving cash.

Common mistakes in the exam

• Recommending the highest-yield investment without regard to liquidity or safety.
• Comparing returns for different periods without annualising.
• Treating a discount instrument’s return as a percentage of face value.
• Describing treasury as only a cash function.
• Ignoring the netting of surpluses against deficits.
• Forgetting the disadvantages of centralisation.

Quick revision

• Invest surpluses on liquidity, safety and profitability.
• Options: deposits, Treasury bills, certificates of deposit, short-dated bonds.
• Treasury: cash, funding, investment, risk, banks, planning, liquidity, payments.
• Centralising nets surpluses and deficits and strengthens bargaining power.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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