Cash and investment management - Essay Example

A local government must make investment for a duration when the money is not required to meet expenditures. This is because most of the investment methods involve risk. Hence local governments should have a thorough knowledge about possible risk and its significance for the revenue enhancement of the local governments. Unlike private sector investments, local governments do not have extensive authority to borrow when their funds are held up in risky investments. If the funds of local government are not liquid they have the option to make internal transfer of funds.

Local governments are required to avoid any situation where money has to be borrowed from other sources. For investment purpose funds should be divided into liquid funds and core funds. While liquid funds can be used for immediate cash requirements, core funds are funds not required for immediate expenses. Liquid funds can be invested in local government investment pools, short term instruments like commercial paper, treasury securities or CD and money market mutual funds for a period of one year and core funds can be invested in financial instruments for a longer period.

The local government should make use of cash flow forecast to allocate funds in liquid and core funds. The local government should calculate the amount of fund for investment by calculating the average deposits. If the average deposit is more than the banks offsetting balance funds will lay idle with the local government. However, the optimal cash balance should be ascertained before investing. Liquid funds can also be used for investment to improve the capital of the local government. Liquid assets, marketable holding and transaction cash should be carefully rotated to invest liquid funds in marketable securities.

A specific number of days payment should be held pending by maintaining a good cash balance at the bank. When the bank balance