What are money market instruments?

Money market instruments are short-term low risk financial instruments which are involved in short-term borrowings and lending with original maturities of one year or shorter periods. These instruments are composed of financial institutions and dealers in money or credit who intend to either borrow or lend. The instruments are traded in the money market. Money market, as contrast to capital market, refers to the borrowing and lending for periods of a year or less. Capital market involves long-term funding. They are usually supplied by bonds and equity instruments.

Types of money market instrument:

The following are the common types and examples of money market instruments:

• Certificate of deposit or CD – This comes from insured time deposits offered to consumers by banks, thrift institutions, and credit unions.
• Repurchase agreements also know as Repo – These are short-term borrowings normally for less than two weeks and often for an overnight basis – arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
• Commercial paper – These are unsecured short-term debt instruments with fixed maturity dates of one to 270 days, usually sold at a discount from face value.
• Eurodollar deposit – Deposits made in U.S. dollars at a bank or bank branch located outside the United States.
• Federal agency short-term securities – (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
• Federal funds – (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
• Municipal notes – (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
• Treasury bills or (T-Bills) – Short-term debt obligations of a national government that are issued to mature in three to twelve months. The returns generated from T-bills are in the form of appreciation of the bond rather than in the form of interest payments.
• Money funds – Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
• Foreign Exchange Swaps – Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.
• Short-lived mortgage-backed and asset-backed securities

Reference: Wikipedia and Investopedia

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1. Maximize talent, skill and knowledge
Increasing our earning potential means enhancing our capabilities. This means we need to maximize our selves. If you are currently an employee and enjoying being such, you can study further to increase your self’s market value. Completing post graduate courses and passing professional certification examinations are two best ways to uplift your professional worth and chance to demand more salary to your boss.

Now if you are an entrepreneur like me, we can all join forces to increase our skills and knowledge by training, researching, enhanced learning and networking. Entrepreneurs and business owners need innovation to continue and increase profiting.

2. Invest more time
Time is an essence for every goal that we want to achieve. Hence, if we want to maximize profit, we should maximize our time in attaining that target. To input more time means to save and gather more time. For business owners and entrepreneurs who enjoy flexibility in time, this could be an advantage. One way to save time is to outsource tasks that consume most of our time but offer only few returns. These jobs include routine functions which we can delegate to other people so that we can have more time to concentrate on our core activities that give us higher returns. The logic is… we pay for less to save time, and we use those times to earn more.

For employees who work for eight hours a day, there are still a lot of hours to engage in money making activities. They can choose from a variety of extra works they can take, depending on their interests and passion. These may include online money making, working at home, baking, selling products, and other jobs that can be done in their extra time.

3. Utilize resources
Outside from our selves, are the tangible assets in our possession such as land, building and equipment. To earn more profit, we need to utilize all our idle resources. If you have a land or a building which are left unused, you may consider finding tenants and enjoy revenue from rents. If you have other equipment (car, office machine, et cetera), that are not fully utilized you can reckon any business activities that can make them profit making machine. Finally, if you have money sleeping under the sun, you can invest them into low risk income yielding investments such as, time deposits, debt securities and mutual funds to earn more in the form of interest and dividend income. And if you really have a business idea which you are confident to succeed, make that money your equity.

4. People
No man is an island. That’s why we have an island so we may live better. Our relatives, friends, affiliates, allies, and anyone who are somehow linked to us can also become our assets or advantages. If you want to gain more profit, you must capitalized your network of people. The bigger your network is, the greater products or services you can sell. The more you can sell the more revenue and profit you can have. Just think of your several followers in Twitter or friends in Facebook. Make them useful and help them by providing them their needs. That means selling them relevant products and services they really need. Just don’t solicit them too much if you don’t want them to leave you.

If you’re an employer, your employees can be your best assets. If you want to maximize productivity and profit, you need to make them more motivated and productive. A demoralized and discouraged group of workers can make your financial results fall down. Hence, you need to know and do the best things that will make them happy and bring your company into profit success. In short, you need to have a better Human Resource Management and leadership skills to earn better comprehensive income.

5. Minimize cost, charges, waste, risk and losses
In the financial sense, if you have a stable revenue, the less cost and expenses you have, the more your profit. For this reason, we need to identify costs and expenses that we can eliminate without affecting the level of our gross sales or revenues. In trading goods, we can reduce our cost of goods sold by reducing gross purchases or increasing purchase discounts. With regard to expenses and charges, we can reduce or eliminate those which cannot affect our revenue and we can avoid in the first place. The following are examples of those charges and expenses:

• Excessive entertainment expenses
• Unimportant travel expenses
• Penalties for non-payment of dues and taxes on time
• Interest expense on delayed loan repayment
• Bank charges on accounts falling into minimum balance
• Credit card charges on buying on account even if cash is available
• Loss on fire (in the absence of insurance)
• Loss on theft and fraud because of non implementation of strong internal control
• Other cost, expenses and losses due to the absence of strategic planning, internal control and risk management.

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The statement of cash flows is presented into operating, investing and financing activities. Operating activities are the main revenue-producing activities of the entity that are not investing or financing activities. These activities may include cash received from customers, cash paid to suppliers or employees, interest paid, income taxes paid, and cash paid for other operating expenses.

Investing activities are the acquisition and disposal of long-term assets (such as property and equipment, investment in associates and subsidiaries and investments in bonds) and other investments not considered to be cash equivalents.

Financing activities are activities that alter the equity capital and borrowing structure of the entity. These activities include proceeds from issuance of shares, cash receipts from obtaining loans and payment of those loans.

Interest and dividends received and paid may be classified as operating, investing, or financing activities, as long as they are classified consistently from period to period. Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities.

The operating portion of a statement of cash flow can be presented using direct method or indirect method. Direct method presentation is encouraged, but the indirect method is acceptable. The direct method shows each major class of gross cash receipts and gross cash payments. The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions.

The statement of cash flows shows how the changes of accounts in the statement of financial position and income affect an entity’s cash and cash equivalents. The statement gives users a picture of the flow of cash flowing in and out of the business.

Users of statement of cash flow include creditors, who needs to know the entity’s ability to repay its obligations; investors, who want to know if a business is sound and can guarantee return of investment; employees, who need to know whether a company can pay them the right compensation; and owners and shareholders, who want to assess if the business can be able to distribute dividends.

Reference:
International Accounting Standards Board (IASB)

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Based on International Accounting Standard (IAS) 1 as amended, issued by the International Accounting Standard Board (IASB), the comprehensive income consists of changes in revaluation surplus; actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19; gains and losses arising from translating the financial statements of a foreign operation; gains and losses on remeasuring available-for-sale financial assets, and the effective portion of gains and losses on hedging instruments in a cash flow hedge. These items are not part of the net profit or net income, but included in the statement to give its users the clear view of an entity’s results of operations, and the operating and financial events that have changed the worth of an owner’s interest in a business.

The components of statement of comprehensive income include the following items:

• revenue
• finance costs
• share of the profit or loss of associates and joint ventures accounted for using the equity method
• tax expense
• a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation
• profit or loss
• each component of other comprehensive income classified by nature
• share of the other comprehensive income of associates and joint ventures accounted for using the equity method
• total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the period:

• profit or loss for the period attributable to non-controlling interests and owners of the parent
• total comprehensive income attributable to non-controlling interests and owners of the parent

Aside from the above items, additional line items may be needed to fairly present the entity’s results of operations. Extraordinary items are not already permitted to be presented in the statement of comprehensive income.

By reading the statement of comprehensive income, the user can assess the revenues, cost, expenses, other income, and other comprehensive income of a business enterprise for the accounting period ended. The net profit or total comprehensive income of a particular company indicates its performance and how its operations went. It answers the question whether if a business incurs a comprehensive loss or comprehensive income for the period. This statement can be very important for owners, investors, creditors and even the estate or government in analyzing profitability, return on equity, return on investment, ability to pay interests on debts, and income taxes.

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What is a statement of financial position?
A statement of financial position, as popularly known as a balance sheet, is one of the basic components of a complete set of financial statements. It is commonly described as a snapshot of an entity’s financial condition as at the end of an accounting period. A standard statement of financial position comprises of assets; liabilities; and owners’, stockholders’ or members’ equity. Assets and liabilities are further divided into current (short-term) or non-current (long-term).

The statement of financial position shows the accounting equation that equals assets to liabilities plus equity. The excess of assets after deducting liabilities is known as the equity or net worth of a business or entity. Current assets include cash and cash equivalents, receivables, inventories, short-term investments and prepayments. Non-current or long-term assets include property and equipment, intangible assets (e.g., goodwill, trademarks and copyrights), long-term investments (such as investment in equity or debt securities), and other non-current assets.

Current liabilities may consist of trade payables (accounts payable), short-term borrowings, and other curret liabilities. Non-current or long-term liabilities may include long-term debts, retirement obligations and other non-current liabilities. Equity may compose of owners’ paid-up capital and accumulated or retained earnings.

What are uses and purpose of a statement of financial position?
The statement of financial position gives its readers and users the financial condition of a certain entity. It shows the liquidity (the ability to readily convert its assets into cash) and solvency (the ability to pay or settle its maturing obligation) of a particular business. It is in this statement that users can identify the strengths and capabilities of a certain entity. Trends such as current ratio (measures solvency), quick ratio (measures liquidity) and debt-to-equity ratio (measures financial and capital risks) can be identified and analyzed in the statement of financial position.

A simple personal statement of financial position gives us the ability to identify our assets or resources we controlled as a result of past events and from which future economic benefits are expected to flow to us; and our liabilities or obligations arising from past transactions or event, the settlement of which may result in the transfer or use of our owned assets, provision of our services or other yielding of economic benefits in the future.

If you are a creditor, you can look and analyze the statement of financial position of a particular company to determine if that company is capable of repaying their obligations before they mature, simply by looking at their quick and current assets and evaluating their debt-to-equity ratio. If you are an investor in a certain company, you can also examine the statement of financial position of your investee company to evaluate its stability and capability to expand operations and increase profitability and financial strength in the long run.

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To save money from our tax dues, we need to have tax planning. For our last year’s income tax, what we can do now is to pay for it on or before its due date to avoid penalties and save you money. For the current accounting period or taxable year that has not yet ended, we can still do something to reduce our taxes. As I said, we need to plan our tax flows. We can still legally avoid tax. Tax avoidance, in contrast to tax evasion, is the legal solution to reduce tax payable by utilizing of the tax system to one’s own advantage. To wrap-up everything, I listed the following ways to reduce our income tax payable.

1. Pay tax before it dues. Simply, penalties and surcharges adds up to your income tax payable, hence avoid it by remitting your dues on or before the deadline.

2. Utilize your tax credits. Sometimes, people are lazy to gather documents. However, certificates of creditable taxes can be good help or can even reduce your income tax payable to zero or negative. So move out! Search and ask those certificates to your customers, tenants or employers.

3. Claim prior year’s overage of tax payment or tax refunds. There will be no inflow or outflow of this amount. You simply claim it to decrease your income tax payable. But watch out also for expirations.

4. Deduct your deductible expenses. Since income tax is based on net income, it means the lesser your net income is, the lesser the tax you will pay. But not all expenses are deductible. In this case, you need to properly plan your future expenses to maximize what are deductible and minimize what are not deductible.

5. Earn more non-taxable income. Like expenses, not all revenues and income are taxable. Hence, if you need to choose between taxable and non-taxable income, it’s always beneficial in tax sense earning free-tax income.

Remember that tax planning should become one of your important financial planning. But still keep in mind that though there are opportunities that we can save money on our tax, it may also means sacrificing our other form of money saving. We can maximize our deductible expenses, but not maximize our revenue potential. We can also minimize our non-deductible expenses but miss types of expenses that are important in our business. Therefore, we should take the whole picture and align our tax planning to our overall financial planning to effectively manage our business and personal finances.

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Debts do not weaken the ownership interest of business owner within the company since the lender does not have the assertion of the business equity. A lender is only allowed to repay the principal agreed-upon of the loan including the interest rates. The lender also has no direct assertion on the business’ future points. Apparently, if the business is successful, the owner obtains a bigger portion of the rewards rather than selling the stocks in order to finance the growth of the company to investors. However in case of interest and principal obligations, and variable rate loans, the amounts are often planned and forecasted.

Debt and equity securities are considered as basic types of financing or loan. It is important to know which of these types is realistic for your business. The borrowed money from debt financing can either be short-term or long-term. The short term can be less than a year while long term can be more than a year. For smaller businesses, debt instruments are often required. This is when commercial debt financing is similar with personal debt financing.

Equity financing is the act of exchanging money for a business ownership share. This type of financing allows business owners to obtain funds without the accumulation of debts or having to repay certain amount of money at a given period. However, one great disadvantage of equity financing is the increase of ownership interests, thus the possibility of loss of control is present. This loss of control may lead to sharing of ownership with supplementary investors.

Debt and equity securities or financing provide various opportunities in producing funds. In the commercial sense, the ratio between the debt and equity securities should be maintained. However from the perspective of lender, the ratio between the debt and equity securities is often measured based on the amount of available assets for repayment of the debt in any event of default. Any excessive debt financing will lead to impairment of the business owner’s credit rating as well as his or her ability to produce money in the future. If a business has too much or extensive debts, it can be considered as an unsafe, overextended, and risky investment.

Too much equity financing on the business will not help business owners to make use of the most productive benefit of the capital. Moreover, the capital is not being used essentially as influence in obtaining cash. However, if the equity financing is too little for the business, the owners are obviously not committed to their business.

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The money market certificates refer to term investment with final maturity of less than a year. It is often offered by credit unions to investors. The credit unions are lending companies like banks that are operated by its members or depositors instead of stockholders. The counterpart of deposits in banks is shares in credit unions. These shares earn the same interest rates as of deposits in the bank.

Compared to money market certificate which has a maturity period of less than a year or at least a year, the certificate of deposit has a maturity period of any time. The certificate of deposit refers to debt tools in banks that have fixed maturity period and interest rates. Once you have secured this certificate you are aware on the exact amount of money you will receive from the bank when the maturity period ends. Typically, interest rates are much higher for longer maturity periods. The maturity period may range between weeks and years. However, certificate of deposit is considered as a fixed deposit account, thus any early withdrawal made from this account will incur penalties from the amount of interest. If you do not want this to happen, do not touch the money savings until the period of maturity lapses.

Money market certificates are more flexible than certificate of deposits. It combines the benefits of savings or checking account and certificate of deposits. It has similarities with other mutual funds whereas the only difference is that it has low risk of investments such as CDs, savings bonds, government t-bills, and other financial tools that are naturally conventional. Funds from money market certificates come with check book that be used in withdrawing cash. This is advantageous for liquidation. The only disadvantage of money market certificates is the varied interest rates, thus you will not know the exact amount of money you will receive after a particular duration.

A money market certificate is regarded as a savings account with high interests. Just like any regular savings bank, the certificate can be opened easily and quickly at any bank. However, compared to regular savings bank, the certificate has higher minimum balance requirements and interest rates as well.

A certificate of deposit is often issued by brokerage firms and commercial banks with specified maturity date and interest rates. The maturity date can be 3 months to 5 months. With this maturity period, the funds cannot be withdrawn until the maturity lapses. At the end of every term, the deposit is often returned with interest to the account holder.

Whether you want to get a money market certificate or a certificate of deposit, your financial situation and needs are often the basis. Therefore, it would be best to consult a finance expert or professional first before opting to buy any of the certificates. This is much recommended especially if you are not sure which one to get.

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Typically, a business would often find possible means to avoid declaration of bankruptcy. One of its solutions is to find a lending institution that will help them pay off its current creditors. However, this solution can be a very tough endeavor for the business since it is hard to search for a lender that provides considerable credit terms. Just the same, equity investors are not that willing enough to allow the combined capital to be consumed by the current creditors.

In most cases, creditors would often ask a business or company to present a restructuring plan that will show on how it will sustain its ongoing operation as well as its future. A review on the historical finances of the business is often done. Part of the review is the prepared projections of balance sheet, loss, profit, and cash flow. The projections must show that the business has enough cash flow to maintain its existing operations.

Hiring for a bankruptcy lawyer is another solution for business to avoid declaration of bankruptcy. This is usually done when the cash flow of the business is tightening and the creditors are starting to interfere with the operations of the business. A bankruptcy lawyer is a legal adviser specializes in business reorganizations. It is common that management does not have enough experience in handling a distressed business.

A bankruptcy lawyer must able to guide the business throughout the process of recovering. This person will act as the filter or barrier against dissatisfied creditors. He or she will also act as the medium to creditors that the business is doing everything to avoid declaring bankruptcy. Searching for a bankruptcy lawyer that is competent, reliable, and experienced can be tough. It would be a good idea to ask for referral from your trusted advisors, accountant, or company legal adviser. Most of the bankruptcy lawyers today undergo a certification process for their specialization, thus look for a lawyer that is certified for the job.

Aside from a bankruptcy lawyer, the business can also hire for a turnaround or financial consultant. This individual can assist the business during the workout process in implementing workout plan, negotiating, formulating plan, communicating with creditors, and preparing financial business projections. Essentially, a business should focus on improving or maintaining its financial performance and operations. Negotiating with the creditors is also an effective solution to avoid declaring business bankruptcy.

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When we speak of cash, it includes money and other mediums that are negotiable and payable in money. It is the most accepted form of exchange medium in banks for immediate credit and deposit. Aside from money, other forms of cash include money orders, bank drafts, checks, coins, and bills. These forms are also widely accepted by banks for immediate encashment or deposit. Apparently, postdated checks are not considered as cash since they are considered as checks. Checks are not often acceptable in banks for outright encashment, deposit, or immediate credit. In addition, the utilization of cash is unrestricted. It is important that an item is reported and recognized immediately for payment of existing obligations.

On the other hand, cash equivalents refer to highly liquid and short-term investments that are immediately convertible into cash. As it approaches its maturity, it presents unimportant risks of changes in value caused by interest rate changes. Because of its short-term maturity, cash equivalents are often discriminated from other investments. The maturity only lasts for three months compared to other investments with short-maturity period of one year or less.

Cash and Cash Equivalents are also considered as “current assets”. It is a list of data on the balance sheet that the company uses to convert into cash in a minimal span of time. It refers to the amount of money that the company has in money market funds, certificates of deposits, savings bonds, and bank accounts. It generally determines the amount of money that is immediately available for use in business. The more amounts of cash reflected on the balance sheet under Cash and Cash Equivalents the better it can be. Because on-hand cash can be used by the business to repurchase shares and pay dividends. It can also be used to provide extra room of funds for the business in case something goes bad with the financial status.

Apparently, there are instances that Cash and Cash Equivalents are not good for the company’s balance sheet. As this happens, the company is not generating sufficient earnings or profits internally. As an option, the company will just borrow money from the bank. If more Cash and Cash Equivalents are seen on the balance sheet of the company, it can be actually borrowed money.

Cash is measured at face value while cash equivalents are measured at maturity value whereas the face value of cash is combined with the interest rates. Moreover, cash is measured in current exchange rate. It is often written down in estimating the real value in case the financial institution or bank is holding the funds of the company due to financial difficulty or bankruptcy.

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