What are Financial Assets?
- Financial Assets are investments held in assets not used day to day in the business. These are usually listed securities such as government/corporate bonds or shares.
- A business could have many reasons for holdings such assets. There could be tactical reasons for holding shares of a ‘target’ business that the company is thinking of acquiring. The company may have excess cash not required to cover working capital requirements – while it considers what to do with these funds, it might invest in Financial Assets to ensure the monies are earning some return.
- If a business’s main activity is non-financial, board approval or formally minute approval may be needed to hold such assets as they would be outside of the company normal activities
What type of Financial Assets would a business hold?
These are low-risk, low-interest investments, usually liquid investments, as they can be traded and immediately converted to cash. While they will have an expiry date, there is no obligation on the holder of a bond to hold it until the Bond expires. Few investors do.
These are the most commonly held Financial assets by a business. The yield or interest receivable will be a function of the wholesale interest rate, sometimes known as the Bank of England rate, and the rates of interest offered by other G7 nations, such as the USA, Japan, or Euro Bonds.
They are virtually risk-free
Corporate bonds are one of the important financial held by the company. The yield on these can be considerably higher than Government Bonds, but for a good reason. There is more of a chance of Corporate Bond defaulting compared to Government Bond – i.e., the investor losing all of some of their investment in the Bond.
There are Corporate Bonds that are considered relatively safe investments. These might include companies with a large amount of cash on their Balance Sheet, Apple, for example, or businesses with a long tradition of repaying Bonds and positioned in a low-risk industry; Unilever is one such example.
Businesses will invest in other company’s listed shares. The most apparent reason to do this is to build up enough of a position to open up talks with the other party to a long-term investment in the company, often involving a seat on that company’s board or possibly launch a takeover bid.
Permission to invest in Financial Assets
Financial assets buying and selling tend not to be part of the regular activities of a business. Executives, therefore, should be conscious of taking a limited risk when entering into such transactions.
Management should have formal sign off to make such investments – via a Board meeting or through powers vested in them by the company Memorandum or Articles of Association
Financial Assets, if carefully selected, can provide some income for the business if it has surplus cash to invest.