Idle Cash

What is Idle Cash?

Idle cash, as the name implies, refers to money that's just sitting there without being put to good use for a business. In simpler terms, it's money that's not growing or making more money for the company.

Instead of earning interest in a savings or checking account or generating profits through investments, this money is just there, not doing much. And to make matters worse, the actual value of this idle cash may even decrease over time because of inflation. In other words, not only does it not grow, but it can also lose its worth due to rising prices.

In essence, idle cash is cash that hasn't been invested, so it's not earning any interest or investment gains. It's money that's not put into accounts or investments that could help it grow. People often refer to it as "wasted" money because it's not doing anything to increase its value.

Understanding Idle Cash

Idle funds are funds that are not actively being used to benefit the entity that owns them. Of course, having idle funds isn't always a bad thing. However, it's critical to understand how it can affect a person's ability to accumulate wealth in the long run.

These are any funds that are not immediately needed to fund a small business's day-to-day activities or business investments. 

Idle funds in local and city governments can refer to money that has not yet been spent on public works, residential development, social services, or economic progress.

Keeping some cash on hand in a safe or checking account is critical to cover both regular and unexpected expenses. However, it is essential not to keep too much money idle. Instead, forecasting and budgeting should be used to keep idle funds to a minimum.

It is money deposited in a bank account that does not pay interest, such as a current account. Even money sitting idle in the brokerage account is inactive because it is not invested and earns nothing.

Definition of Cash and Idle Cash

Cash is frequently defined as physical, legal tender in the form of bills or coins from a purely practical standpoint. However, in the business world, cash is commonly classified as cash and cash equivalents. 

It includes the above-mentioned practical definition but can also have cash deposited into a bank account or invested in highly liquid assets such as money market securities, ultra short-term securities, etc. Idle money is typically one of the two items listed below. 

This is not an exhaustive list but provides illustrations demonstrating the concept.

• Physical cash is kept in a safe at home or work.
• Deposit of money into a non-interest bearing account

Cash is typically defined as bills or coins that serve as legal tender. However, cash and cash equivalents are included in idle money. So cash deposited in a bank account that pays no interest, including a current account, is also idle money. 

Strategic Utilization of Idle Cash

A company often finds opportunities to strategically employ its surplus funds in various ways, which can have far-reaching benefits. These include:

1. Capital Investment:

A company may wish to use idle funds to purchase new machinery, build new plants, expand its transportation fleet, or buy other fixed assets that will increase production capacity. 

2. Inventory Expansion:

If a company is a merchandiser, it may decide to invest in more warehouse space or prepay certain expenses, such as rent and insurance.

3. Mergers and Acquisitions:

Excess cash reserves can be instrumental in facilitating desirable acquisition deals, enabling the company to expand its market presence or diversify its operations.

4. Investment in Securities:

Spending idle cash in the short term can result in long-term cost savings. Idle funds could also purchase investment securities like stocks and bonds. The realized gains and interest received are recorded on the income statement as other income.

Wise Deployment of Idle Cash for Individuals and Businesses

Idle money can be invested in an interest-bearing instrument, the stock market, a productive asset, and other options. Investors must choose an investment option based on their needs, risk tolerance, and financial goals. The following are some appropriate ways of using idle cash:

1. Expense Prepayment:

A business can use it to prepay some expenses like rent or insurance or any other expense necessary for the company's day-to-day operations.

2. Bank Deposits:

A person can also put her idle money to good use by depositing it in a bank account, either a checking or a savings account. The most liquid interest-bearing account is the checking account, which allows the user to withdraw cash immediately, but the interest rate is shallow. The cash can also be deposited in a savings account by the owner. Although not as liquid as a checking account, the interest rate is higher.

3. Bank Term Deposits:

Another option is to put the money into a bank term deposit. It works similarly to a bank account, except the funds are locked for some time. In addition, the interest rate on a term deposit is higher than that on a savings account.

4. Investment in Securities:

Individuals can also put their spare cash into a debt or equity instrument. Stock investing is highly liquid because stocks can be easily sold in the secondary market. However, the risk is higher, as are the rates of return. On the other hand, bonds are less liquid and safer than stocks.

5. Corporate Uses of Idle Funds:

A company can also use idle funds to redeem outstanding shares, pay dividends, or buy back stock. Again, a move like this could help boost stock prices.

6. Employee Investment:

A company can also use cash on employees to increase retention by investing in group medical coverage, bonuses, stock options, and other methods.

Use of Idle Money by Businesses

A company can use idle funds to pay a debt, reduce interest costs, and improve credit. Another option is to create a sinking fund, a reserve used to pay off debts in annual installments.

Excess cash can also fund retention programs such as bonuses, stock options, performance bonuses, and group health care.

Many corporations and shareholders over dividends prefer stock buybacks. A buyback occurs when a company purchases shares on the secondary market. 

The appeal is that capital gains are taxed only on shareholders who choose to sell, whereas dividends generate taxable income for all shareholders. 

Buybacks are also more adaptable because the buyer is not obligated to follow through or continue the program if cash runs out unexpectedly. 

Meanwhile, decreasing the number of outstanding shares can raise stock prices, which generally pleases shareholders.

Dangers in Holding Idle Cash

When there is inflation, holding idle cash becomes even more dangerous. Because the longer idle funds are kept, the less valuable they become.

It can be understood with an example, suppose a person has $500 kept with him safely. 

According to current prices, 50 chocolates can be purchased for $500 at the price of $10 each, but a year from now, 50 chocolates will cost $550, resulting in a per chocolate price of $11 due to an increase in costs of raw materials. This results in a $50 reduction in purchasing power.

If these $500 are deposited in a bank account that pays a 10% interest rate per year, this investment will earn $50 in a year. If this investment is not made, those $500 will not appreciate as no interest will be received. Also, $50 will be lost as an opportunity cost.

In this, the total loss faced by the person will be $100, out of which $50 is due to inflation, and the other $50 is due to opportunity cost.

Working of Idle Cash

Idle cash, idle money, and idle funds all primarily mean the same thing: idle money.

A person, business, or government may have idle funds for various reasons. For instance, a person may have funds in their checking or cash management account that they intend to transfer to their online brokerage account.

Meanwhile, small business owners may have idle funds if they keep cash reserves in a bank account that doesn't pay interest. They may have set aside these funds to buy new equipment, renovate their business location, or pay an upcoming tax bill.

Small business owners could also keep a few thousand dollars in petty cash on hand. But it's just sitting there if that money isn't earning interest.

The common thread is that idle funds are being underutilized. Changing idle funds to active funds, on the other hand, can be as simple as opening a brokerage or savings account or using the cash to create a business investment to help boost revenues.

Leveraging Idle Cash

Idle money can be considered a lost opportunity in the financial world because it has no chance of growing if it is not earning interest.

Suppose a person sells his car and receives $15000 in cash. However, he is not willing to purchase a new vehicle very recently and is pondering what to do with the money. 

This situation brings up two options for the person. The first is to keep it with himself in the wardrobe until he needs it, and the second is to put it in a savings account.

The first option leaves no scope for the growth of the money, and it may even lose its value because of inflation. In contrast, in the second option, the person will receive a particular interest annually; hence, the money will be appreciated eventually.

Another option could be investing the money in stocks to earn compound interest potentially. For example, if $15000 is invested in the stock market and a 7% annual rate of return is assumed, then the money can grow to $16050 in just one year, and if it is kept for twenty years undisturbed, then its value can grow up to $58045.

The preceding example demonstrates how costly having idle funds can be, especially when inflation is considered. Inflation is the gradual increase in the cost of goods and services. If the money grows faster than prices, one can offset the effects of inflation by investing. 

Allowing funds to sit idle increases the possibility of inflation eroding one's purchasing power over time.

Researched and authored by Kavya Sharma | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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