The cash equivalent is defined as safe investments that carry such a low amount of risk that the outcome is virtually ensured. There are a number of different types of investments that may be properly identified as cash equivalents. Cash equivalents tend to be easily converted into cash if necessary, and may be used as collateral in some cases.
Interest bearing investments are one of the best examples of cash equivalents. Within this group, such items as Treasury bills and money market funds are common types of this sort of asset. Short-term municipal bonds, especially those with a maturation date of three months, are often understood to be cash equivalents.
With the operation of a business, outstanding Accounts Receivable balances are considered to be cash equivalents. In fact, there are a number of services that will lend troubled companies the face value of the invoices generated at a given billing period, and use the payments of the invoices to pay off the loan. Generally, the lender will subtract a fee from the face value of the invoices that will be in the range of three to five percent.
Around the home, cash equivalents may include several other financial instruments. Checks or money orders that are awaiting deposit or redemption in some manner qualify as a cash equivalent. Gift certificates are a time honored form of the cash equivalent. More recently, many restaurants and other retail outlets have begun to issue private branded cash cards that can be loaded with any amount and used for purchases at a specific retail chain. These private branded cards function as cash equivalents in the same manner as gift certificates.
There are two advantages normally associated with cash equivalents. First, the financial instrument is easily negotiable, and may be converted into cash with very little trouble. Second, cash equivalents such as gift cards and gift certificates make it possible to purchase goods and services without the need to carry cash or use credit cards. In both instances, cash equivalents allow individuals to achieve satisfaction in a very short period of time.