Investment decisions

A financial decision which is concerned with how the firm’s funds are invested in
different assets is known as investment decision. Investment decision can be long-
term or short-term.
A long term investment decision is called capital budgeting decisions which
involve huge amounts of long term investments and are irreversible except at a
huge cost. Short-term investment decisions are called working capital decisions,
which affect day to day working of a business. It includes the decisions about the
levels of cash, inventory and receivables.

 It seek to determine as to how the firms found are invested in different assets
 It helps to evaluate new investment proposals and select best option.
 It can be short term or long term
 Long term investment is called capital budgeting and short term investment
is called working capital management.

The scope of investment decision includes allocation of funds

towards following areas:

 Expansion of business
 Diversification of business
 Productivity improvement
 Product improvement
 Research and Development
 Acquisition of assets (tangible and intangible), and
 Mergers and acquisitions.

Further, Investment decision not only involves allocating capital to long term
assets but also involves decisions of utilizing surplus funds in the business, any
idle cash earns no further interest and therefore not productive. So, it has to be
invested in various as marketable securities such as bonds, deposits that can earn
income.

Most of the investment decisions are uncertain and a complex process as it

involves decisions relating to the investment of current funds for the benefit to be
achieved in future. Therefore while considering investment proposal it is important
to take into consideration both expected return and the risk involved. Thus, finance
department of an organization has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.

Long term investment decisions also called capital budgeting decisions.

A long-term investment is an account on the asset side of a company's balance

sheet that represents the company's investments, including stocks, bonds, real
estate, and cash. Long-term investments are assets that a company intends to hold
for more than a year.

The long-term investment account differs largely from the short-term

investment account in that short-term investments will most likely be sold, whereas
the long-term investments will not be sold for years and, in some cases, may never
be sold.

Key factors
 A long-term investment is an account a company plans to keep for at least a
year such as stocks, bonds, real estate, and cash.
 The account appears on the asset side of a company's balance sheet.
 Long-term investors are generally willing to take on more risk for higher
rewards.
 These are different from short-term investments, which are meant to be sold
within a year.

Importance of Long term investment decisions

 They directly affect the profitability or earning capacity of the business
enterprise
 They affect the size of assets, scale of operations and competitiveness of
business enterprise
 Large amount of money involved or involves committing the finance on
long term basis
 Impact of the earnings in long run
 Risk involved
 Decisions are crucial to acquire a fixed asset or opening a new branch
  Irreversible decisions

Factors affecting Long term investment

 Rate of return and risk involved
 Cash flows of the project
 Investment criteria involved

 Cash Flow of the Project- Before considering an investment option,

business must carefully analyse the net cash flows expected from the
investment during the life of the investment. Investment should be done only
if the net cash flows are more than the funds invested.
 The Rate of Return- The rate of return is the most important factor while
taking an investment decision. The investment must be done in the projects
which earn the higher rate of return provided the level of risk is same.
 The Investment Criteria Involved- Before taking decision, each
investment opportunity must be compared by using the various capital
budgeting techniques. These techniques involve calculation of rate of return,
cash flows during the life of investment, cost of capital etc.

Short term investment decisions also called working capital investment.

Short term investment decisions are the decisions related to day to day
working of a business enterprise. They are also called as working capital decisions
because they are related to current assets and current liabilities like management of
cash, inventories, receivable etc.
Short-term investments, also known as marketable securities or temporary
investments are those which can easily be converted to cash, typically within 5
years. Many short-term investments are sold or converted to cash after a period of
only 3-12 months. Some common examples of short term investments include
CDs, money market accounts, high-yield savings accounts, government bonds and
Treasury bills. Usually, these investments are high-quality and highly liquid assets
or investment vehicles.

A short-term investment is an investment you expect to hold for 3 years or

less, then sell and/or convert to cash. Examples of short-term investments include
money market funds, certificates of deposit, and short-term bonds.
Examples of Short-Term Investments
Some common short-term investments and strategies used by corporations and
individual investors include:

 Certificates of deposit (CDs): These deposits are offered by banks and

typically pay a higher interest rate because they lock up cash for a given
period. They are FDIC-insured up to $250,000.
 Money market accounts: Returns on these FDIC-insured accounts will beat
those on savings accounts, but require a minimum investment. Keep in mind
that money market accounts differ from money market mutual funds, which
are not FDIC-insured.
 Treasuries: There are a variety of these government-issued bonds, such as
notes, bills, floating-rate notes, and Treasury Inflation-Protected
Securities (TIPS).
 Bond funds: Offered by professional asset managers/investment companies,
these funds are better for a shorter time frame and can offer better-than-
average returns for the risk. Just be aware of the fees.
 Municipal bonds: These bonds, issued by local, state, or non-federal
government agencies, can offer higher yields and tax advantages since they
are often exempt from income taxes.
 Peer-to-peer (P2P) lending: Excess cash can be put into play via one of
these lending platforms that match borrowers to lenders.

Features of short term investment

 Required to meet day to day expenses
 Concerned with the decisions about the levels - Cash, stock and receivables
required to be held for smooth functioning of a business.
 It affects liquidity and profitability
 It directly affects the stability of the business.

Factors affecting short term investment

 Rate of return and risk involved
 Cash flows of the project
 Investment criteria involved
Cash and Cash Equivalents (CCE)

What Are Cash and Cash Equivalents (CCE)?

Cash and cash equivalents refers to the line item on the balance sheet that
reports the value of a company's assets that are cash or can be converted into cash
immediately. Cash equivalents include bank accounts and marketable securities,
which are debt securities with maturities of less than 90 days. However, oftentimes
cash equivalents do not include equity or stock holdings because they can fluctuate
in value.

Examples of cash equivalents include commercial paper, treasury bills, and short-
term government bonds with a maturity date of three months or less. Marketable
securities and money market holdings are considered cash equivalents because
they are liquid and not subject to material fluctuations in value.

Understanding Cash and Cash Equivalents (CCE)

Cash and cash equivalents are a group of assets owned by a company. For
simplicity, the total value of cash on hand includes items with a similar nature to
cash. If a company has cash or cash equivalents, the aggregate of these assets is
always shown on the top line of the balance sheet. This is because cash and cash
equivalents are current assets, meaning they're the most liquid of short-term assets.

KEY FACTORS
 Cash and cash equivalents refers to the line item on the balance sheet that
reports the value of a company's assets that are cash or can be converted into
cash immediately.
 Cash equivalents include bank accounts and marketable securities such as
commercial paper and short-term government bonds.
 Cash equivalents should have maturities of three months or less

Types of Cash and Cash Equivalents

Cash and cash equivalents help companies with their working capital needs since
these liquid assets are used to pay off current liabilities, which are short-term debts
and bills.
Cash
Cash is money in the form of currency, which includes all bills, coins, and currency
notes. A demand deposit is a type of account from which funds may be withdrawn
at any time without having to notify the institution. Examples of demand deposit
accounts include checking accounts and savings accounts. All demand account
balances as of the date of the financial statements are included in cash totals.

Foreign Currency
Companies holding more than one currency can experience currency
exchange risk. Currency from foreign countries must be translated to the reporting
currency for financial reporting purposes. The conversion should provide results
comparable to those that would have occurred if the business had completed
operations using only one currency. Translation losses from the devaluation of
foreign currency are not reported with cash and cash equivalents. These losses are
reported in the financial reporting account called "accumulated other
comprehensive income."

Cash Equivalent
Cash equivalents are investments that can readily be converted into cash. The
investment must be short term, usually with a maximum investment duration of
three months or less. If an investment matures in more than three months, it should
be classified in the account named "other investments." Cash equivalents should be
highly liquid and easily sold on the market. The buyers of these investments should
be easily accessible.

The amount of cash equivalents must be known. Therefore, all cash equivalents
must have a known market price and should not be subject to price fluctuations.
The value of the cash equivalents must not be expected to change significantly
before redemption or maturity.

Certificates of deposit may be considered a cash equivalent depending on the

maturity date. Preferred shares of equity may be considered a cash equivalent if
they are purchased shortly before the redemption date and not expected to
experience material fluctuation in value.
Cash Equivalents

Cash equivalents are investments securities that are meant for short-term investing;
they have high credit quality and are highly liquid.

KEY FACTORS
 Cash equivalents are the total value of cash on hand that includes items that
are similar to cash; cash and cash equivalents must be current assets.
 A company's combined cash or cash equivalents are always shown on the
top line of the balance sheet since these assets are the most liquid assets.
 Along with stocks and bonds, cash and cash equivalents make up the three
main asset classes in finance.
 These low-risk securities include U.S. government T-bills, bank CDs,
bankers' acceptances, corporate commercial paper, and other money market
instruments.
 Having cash and cash equivalents on hand speaks to a company's health, as
it reflects the firm's ability to pay its short-term debt

There are five types of cash equivalents:

1. Treasury bills,
2. commercial paper,
3. marketable securities,
4. money market funds, and
5. Short-term government bonds.

Treasury Bills

Treasury bills are commonly referred to as “T-bills." These are securities issued by
the United States Department of Treasury. When issued to companies, companies
essentially lend the government money. T-bills are provided in denominations of
$1,000 to $5 million. They do not pay interest but are provided at a discounted
price. The yield of T-bills is the difference between the price of purchase and the
value of redemption.

Commercial Papers
Commercial papers are used by big companies to receive funds to answer short-
term debt obligations like a corporations’ payroll. They are supported by issuing
banks or companies that promise to fulfill and pay the face amount on the
designated maturity date provided on the note.

Marketable Securities
Marketable securities are financial assets and instruments that can easily be
converted into cash and are therefore very liquid. Marketable securities are liquid
because maturities tend to happen within one year or less and the rates at which
these may be traded have minimal effect on prices.

Money Market Funds

Money market funds are like checking accounts that pay higher interest rates
provided by deposited money. Money market funds provide an efficient and
effective tool for companies and organizations to manage their money since they
tend to be more stable compared to other types of funds like mutual funds. Its share
price is always the same and is constantly at $1 per share.

Short-Term Government Bonds

Short-term government bonds are provided by governments to fund government
projects. These are issued using the country’s domestic currency. Investors take a
look at political risks, interest rate risks, and inflation when investing in government
bonds.
Ownership Investments
Ownership investments are what comes to mind for most people when the word
"investment" is batted around. They are the most volatile and profitable class of
investment. The following are examples of ownership investments:

Stocks: A stock is literally a certificate that says you own a portion of a company.
More broadly speaking, all traded securities, from futures to currency swaps, are
ownership investments, even though all you may own is a contract. When you buy
one of these investments, you have a right to a portion of a company's value or a
right to carry out a certain action (as in a futures contract).

Your expectation of profit is realized (or not) by how the market values the asset
you own the rights to. If you own shares in Apple (AAPL) and the company posts a
record profit, other investors are going to want Apple shares too. Their demand for
shares drives up the price, increasing your profit if you choose to sell the shares.

Business: The money put into starting and running a business is an investment.
Entrepreneurship is one of the hardest investments to make because it requires
more than just money. Consequently, it is also an ownership investment with
extremely large potential returns. By creating a product or service and selling it to
people who want it, entrepreneurs can make huge personal fortunes. Bill Gates,
founder of Microsoft and one of the world's richest men, is a prime example.

Real Estate: Houses, apartments or other dwellings that you buy to rent out or repair
and resell are investments. However, the house you live in is a different matter
because it is filling a basic need. It fills a need for shelter and, although it may
appreciate over time, shouldn't be purchased with an expectation of profit. The
mortgage meltdown of 2008 and the underwater mortgages it produced are a good
illustration of the dangers in considering your primary residence an investment.

Precious objects and collectibles: Gold, Da Vinci paintings and a signed

LeBron James jersey can all be considered an ownership investment - provided
that these are objects that are bought with the intention of reselling them for a
profit. Precious metals and collectibles are not necessarily a good investment for a
number of reasons, but they can be classified as an investment nonetheless. Like a
house, they have a risk of physical depreciation (damage) and require upkeep and
storage costs that cut into eventual profits.

Lending Investments
Lending investments allow you to be the bank. They tend to be lower risk than
ownership investments and return less as a result. A bond issued by a company will
pay a set amount over a certain period, while during the same period the stock of a
company can double or triple in value, paying far more than a bond - or it can lose
heavily and go bankrupt, in which case bondholders usually still get their money
and the stockholder often gets nothing.

Your savings account: Even if you have nothing but a regular savings account,
you can call yourself an investor. You are essentially lending money to the bank,
which it will dole out in the form of loans. The return is currently quite low, but the
risk is also next to nil because of the Federal Deposit Insurance
Corporation (FDIC).

Bonds: Bond is a catch-all category for a wide variety of investments from

Treasuries and international debt issues to corporate junk bonds and credit default
swaps (CDS). The risks and returns vary widely between the different types of
bonds, but overall, lending investments pose a lower risk and provide a lower
return than ownership investments.

Disinvestment: 7 Methods implemented to Achieve Objectives of

Disinvestment in India

In order to achieve the various objectives and goals of disinvestment many

methods have been formulated and implemented. These include:
(a) Public Offer:

Offering shares of public sector enterprises at a fixed price through a genera

prospectus. The offer is made to the general public through the medium of
recognized market intermediaries. Initially equity was offered to retail investors
through domestic public issues. This was followed by issuance of the Global
Depository Receipts (GDRs) to tap the overseas market.

(b) Sale of Equity:

Sale of equity through auction of share amongst pre-determined clientele, whose

number can be large. The reserve price for the PSE’s equity can be determined with
the assistance of merchant bankers.

(c) Offer for Sale:

Offer for sale, determining the fixed price for sale of a public enterprise, inviting
open bidders and accepting highest bidder’s quotation for sale.

(d) Cross Holding:

In the case of cross holdings, the government would simply sell part of its shares of
one PSU to one or more PSUs.

Asset reliability Management

Many organizations struggle with a high level of uncertainty when it comes

to asset reliability. Whether equipment will be available when it’s needed to meet
customer demands may be anyone’s guess. Loss of availability results in increased
human and monetary costs and often can jeopardize safety or environmental
regulations compliance.
 To establish a solid foundation for reliability, the organization must first address
the basics. There are eight steps to accomplish this, presented here in no particular
order.

1. Align the organization for reliability

In conducting this alignment, there are three questions to address:

 Which job positions are affected?

 What are the role expectations?
 How is position performance measured?

2. Determine your maintenance strategies

In many cases, those same organizations are issuing multiple Preventive

Maintenance (PM) for a given period on the same asset (i.e. weekly or monthly
basis). Many of these PMs are the result of knee-jerk reactions to past failures and
are not generated from a root-cause perspective
3. The MRO storeroom ( Material Management Process)

A vital component to ensuring effective work execution and improved reliability is

a well-managed MRO storeroom or materials management process. The reality is
that most storerooms are either models of excellence or very poorly executed.
There does not seem to be much middle ground when it comes to an organization’s
storeroom practices.

When poorly managed, it is common to find storerooms with more than 50%
of the materials being obsolete. Old removed (i.e., worn-out) parts litter the
storeroom shelves, waiting for reuse, only to fail quickly when they’re installed.
Drive belts hanging from pegs on the wall are cracked and dry-rotted. Conditions
like these are counterproductive to ensuring asset reliability. The storeroom is or
becomes a cost burden instead of a profit center when poor practices exist.

Materials should be identified and acquired in advance for planned work.

These materials should be should be assembled in kits and staged in secure areas
for the forthcoming work.
4. Identifying and prioritizing the work

From a best-practices perspective, 90% of all work should be planned and

scheduled. However, many reactive organizations engage in 60%–90% unplanned
work. Every hour spent planning the work saves three to five hours in execution.
But to plan it, it needs to be identified in the CMMS. By identifying the work,
regardless of whether it’s corrective, emergency or urgent, helps provide an
equipment history. We understand how long an asset is down, the reliability of the
asset, and where we are spending our maintenance dollars. The maintenance or
reliability engineer then can utilize this equipment history to improve asset
reliability and reduce overall costs.

5. Planning to ensure reliability in all your assets

Enforce the use of standardized work procedures. The intent is to eliminate poor
work behaviors as well as human error. Variability creates uncertainty. If everyone
performs a task their own way, who’s to say which way is the right way? When
you have failures, how can you determine what specifically caused the failure?
Planned work avoids delays, ensures materials availability, and drives craftsperson
efficiency. From a reliability perspective, job plans developed by the planner are
written to a specification (i.e., torque values, gaps, fits, clearances, belt tension
settings, alignment tolerances).

6. Proactive scheduling
Poor maintenance scheduling practices (or a lack of scheduling) indicates
reactivity in the organization. In reactive organizations, partnerships between
maintenance and production are limited, and many times the departments are
siloed.
7. Continuous improvement loops to move forward
 With respect to work completion, specifically for planned and scheduled work, we
must have a continuous improvement loop to improve the processes. Many
proactive organizations issue a feedback form with the work-order package. Using
Deming’s concept of the “plan, do, check, act” cycle, this piece is the “check”
portion.

Here we address the following questions:

 Where you able to complete the job?

 Was the scope of the job correctly identified?
 Was the time estimate appropriate for the work?
 Did we have the right materials?
 Where the listed tasks and specifications correct?
 Is any follow-on work required?
 Did we identify the correct crafts?

8. Auditing and measuring for success

Much like the continuous improvement loop, auditing gives us a method to ensure
our processes are working as intended. If not, we can adjust based on what we
learn. To audit, randomly pull three or so completed work orders from the stack.
Take the plant manager, the maintenance manager, the planner-scheduler, the
storeroom coordinator, and the technician(s) who completed the work, and walk
down the job by asking:
 Was the work properly scoped?
 Was the asset/component properly identified at the right (lowest) level in the
asset hierarchy?
 Was the work planned, and was the plan accurate and adequate with tasks,
parts, and priority detailed?
 Were the parts and materials correctly kitted and staged?
 Was the work completed as scheduled?
 Was the feedback form properly used, with adequate closure information
entered?
 Did work order completion and closure occur?