Short-term financial investments are represented by investments of business entities in various financial instruments for a twelve-month period. The main forms of such investments are the acquisition of short-term bills, bonds, savings certificates, as well as deposits with a term of less than a year.
Short-term financial investments are a way for an enterprise to use its free cash assets with additional benefits in the future, or at least simply protect them from inflation losses. Due to its high liquidity, short-term investments can be equated with means of payment and, thus, provide priority financial obligations of an economic entity. Also in financial management, they can be considered as monetary assets, therefore the same leverage applies to them.
Short-term financial investments must be considered from the side of the subject, in whose activity these funds come. After all, a year is too short a time to make a significant profit. That is why the acquired funds are mainly used to purchase materials and raw materials (highly liquid items of any balance). However, there are positive aspects in this type of investment. First of all, the least risk of losing funds, since the economic situation throughout the year can be most accurately calculated and predicted.
However, in the modern complex world, in addition to economic factors that have a significant impact on the economic activity of entities, it is necessary to evaluate the political situation (for example, elections). Also of no small importance is the exchange rate of the national currency.
Some lenders prefer to provide funds at sufficiently high interest rates that minimize the risks and losses associated with the lack of loan repayments.
Short-term financial investments in financial instruments such as securities are considered profitable only if the acquired shares are quoted on the financial market and can be easily converted into cash at any time.
When making short-term investments, enterprises and just individuals often seek help from specialists calculating the income received, comparing it with the risk that may arise over several months of investing free funds. Sometimes the analysis even uses special software.
In accounting, this type of investment is indicated in the same account 58, which keeps records in the context of the list of assets. This may include shares that were purchased in order to obtain future benefits, but with a validity period of up to one year. This list also indicates such types of securities as debt, state and local authorities with a maturity of twelve months or involving income in one year. This account takes into account loans issued to other organizations with a repayment period of up to 12 months, as well as bank deposits.
In addition to account 58, this type of investment can be accounted for in the subaccount of account 82, which, according to its name “Provisions for doubtful debts”, forms a profit for the purchase of short-term securities in the near future. Their book value is determined similarly to long-term and represents the actual costs of the investor.
Short-term financial investments in the balance sheet are displayed in lines 250-253. Line 250 is “accumulating” and consists of the sum of lines 251-253, which decrypt it according to subaccounts, namely:
- line 251 reflects the amount of borrowed funds that were issued to other business entities for a period of less than a year;
- 252 represents the amount of own shares that were repurchased from shareholders;
- line 253 shows other short-term investments (bonds, securities and deposits).