Cash and Cash Equivalents (CCE)
Candlefocus EditorCash Equivalents are investments that are treated as if they are cash, so the investment is extremely liquid; meaning the investment can be converted to cash immediately without loss of principal. Cash Equivalents arise from a variety of financial instruments such as marketable securities, commercial paper, money market funds, treasury bills, and savings accounts.
As Cash and Cash Equivalents are highly liquid assets, companies can use them for everyday expenses such as salaries, rent payments and other regular operating expenses. Companies use cash and cash equivalents to pay their short-term bills. This helps to preserve capital for long-term deployment rather than continuously relying on debt or equity financing to finance their current operations.
Another reason why companies keep cash and cash equivalents is to take advantage of short term opportunities in the market such as stock investments or repaying debt. Companies can also use cash and cash equivalents to ensure they have sufficient funds during periods of low profitability or to take up market share during a recession.
On the balance sheet, it is important to note that Cash and Cash Equivalents are reported with the current assets, meaning that the cash and cash equivalents are used for operations within the next 12 months. The important elements to consider here are the creditworthiness of the issuer and the liquidity of the security.
Cash and Cash Equivalents form the core liquid asset that companies rely on to manage their operations, pay their debts and make the necessary investments to grow their business. Therefore, it is important for companies to properly manage their CCEs and understand what investments are considered CCEs and which are not.