Why do companies use cash equivalents?

Companies use cash equivalents primarily to maintain liquidity while generating returns. Cash equivalents consist of short-term, highly liquid investments that can readily be converted to cash, often with minimal risk. This approach allows companies to have immediate access to funds for operational needs, such as paying bills or meeting unexpected expenses, while simultaneously earning a small return on those idle cash funds through investments in instruments like treasury bills or money market funds.

This liquidity is crucial for businesses to ensure they can meet their short-term obligations without the need to liquidate other assets, which might take longer and could incur transaction costs or loss in value. The capability to have liquid assets that are also earning a return supports a company's financial health and efficiency in capital management.

The other choices do not accurately reflect the primary purpose of cash equivalents. Securing loans relates more to creditworthiness and collateral, categorizing fixed assets pertains to longer-term investments that are not as liquid, and handling long-term investments involves a different strategy focused on growth and not immediate liquidity needs.