The Bonds That Tie Investment Goals Together.

• Author: Finkelstein, Todd A.

The tapestry of a corporate balance sheet reflects the craftsmanship of the organization's financial artisans. Illuminating the balance of equity vs. debt financing and the blend of fixed and financial assets, the balance sheet weaves together the critical elements of a company's story. The flow from the balance sheet to the income statement highlights the successes and failures of the financial and business plans. On close examination, fixed-income securities appear to be a recurring and important thread.

Fixed-income securities are prominent on both the asset and liability sides of the balance sheet. But the investment of balance sheet cash involves some variables, and there's a way to maximize return with minimal additional risk. While borrowing is important to financial flexibility, the art and science of managing debt issuance is another story. Let's look at the investing aspects of fixed income.

Common to all investing, whether balance sheet cash or pension assets, is the need for a disciplined, controlled investment process. The first and most important step is to thoroughly understand the return objectives, risk profiles and any special circumstances that might affect the management of the portfolio. Committed to paper, this makes up the investment policy statement, which becomes a road map. Be sure to have one in place before beginning your investment program.

Balance Sheet Cash

The dynamic nature of the corporate engine necessitates that some cash generally be available to cover anticipated operating expenses. Cash functions as a lubricant to operate efficiently and, in some instances, as a war chest for maximum acquisition flexibility. As a result, safety of principal is generally more important than return for this balance sheet item, leaving the other assets to reflect the general business risk. While such safety should be the primary objective of the investment policy statement, it need not be mutually exclusive of competitive returns.

The mathematics of fixed-income securities require that investment of balance sheet cash be kept short so any increase in interest rates won't erode principal appreciably, consistent with the primary objective. The obvious choices -- bank sweep vehicles, money market funds or discrete money market instruments -- have varying advantages. But all maximize liquidity and safety in one way or another. Bank sweep vehicles are typically the lowest-yielding, but are the most convenient. With time at a...