When does a company move cash from its noninterest-bearing demand account to marketable securities?
All companies face a tradeoff between their need for liquidity, which argues for keeping cash in a demand account where it can be accessed immediately, and their desire to earn as much income as possible, which argues for keeping every last dollar of cash in an interest-bearing deposit. In general, a company moves cash from its non interest-bearing demand account to marketable securities whenever it determines that its cash balance is greater than required for liquidity. If there is no cost to make the transfer, then every cent above the minimum liquidity need should be moved to securities, as is done in some bank accounts that “sweep” all cash above a specified amount into a money market fund. However, if there is a brokerage cost or other fee to move the money, the company must include this cost in its analysis.