Idle Cash

Companies experience seasonal variation in their business activities which impacts on cash resource of the company. The cash is optimally used when business is in peak season and the cash resources are held on the bank account and business safes when the business is low.

Idle cash is the cash in excess of the immediate requirements of the business which is not earning any return. This cash may be kept in safes in the business premises or in the bank accounts. The immediate requirements which require cash to be kept include payroll costs, loan repayment and payment of suppliers. Some companies hold idle cash as a contingency for possible future unexpected cash demands because of lack of proper planning. To minimize risks associated with the practice of holding idle cash, a business should have a yearly cash flow plan indicating the cash inflows and outflows and the cash balance at the end of each month. The excess cash as disclosed by the cash flow should be invested for the period it is available.

The periods for investment of idle cash can vary from business to business but may include shorter periods of less than a month. The short term investment opportunities are offered by all commercial banks. The investor should consider the cost of terminating the investment in case urgent cash requirements arise during the period of investment.

It is important to note that cash must be fully employed in the business during the year if the business has to earn maximum profits. Idle cash has a cost associated to it in the form forgone interest return on it . It is therefore important for the business to plan for investment of idle cash at all times.

Holding idle cash can also be tempting to some employees with weak morals. Idle cash can be easily stolen or misappropriated by employees on their own or in collusion with external parties. All reported cash frauds have involved stealing of idle cash held by organizations in either the office safes or in the the bank accounts. Prudent investment of idle cash can in a way may reduce some of the cash frauds.

The business can invest the idle cash in a number of ways including the following;

  • Pay off the debt
  • Pay dividends in case the available cash is as a result of profits made
  • Investing in Treasury bills
  • Investing in corporate bonds if they are available
  • Investing in short term products offered by banks.
  • Placing the cash on fixed deposits with commercial banks

Long term investments in business expansion programmes , buying shares or investment in long term bonds among others can be considered if excess cash is available for long-term.

In conclusion , it is not a good business practice to keep idle cash as it costs money to keep it. You could end up losing it all through frauds.

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