What Are Idle Funds?
Idle funds refer to money that has not been invested and is, therefore, not earning interest or investment income. Idle funds are simply funds that are not deposited in an interest-bearing or investment tracking vehicle, that is, are not participating in the economic markets. These funds are often thought of as "wasted" funds since they do not appreciate in any manner.
Key Takeaways
- Idle funds are any cash that you haven't invested in an interest-bearing account or in the financial markets.
- When inflation is rising, the idle funds are in effect losing value as they are not even growing at the pace of rising costs.
- To counteract this tendency, an individual could deposit the cash in a money market account or short-term interest account.
- Businesses can use idle funds to buy fixed assets that improve productivity, like machinery or warehouse space.
- Companies can also use the money to pay down debt, buy back stock, increase dividends or take other actions that may benefit shareholders.
Understanding Idle Funds
In instances where there is a positive inflation rate in a domestic nation, idle funds will actually decrease in value from a purchasing power perspective, as the funds fail to keep up with the rate of inflation. One option individuals have to earn income on funds while maintaining liquidity of those funds is to invest in money market or short-term interest accounts that will provide the depositor with a short-term rate of interest.
How Businesses Can Use Idle Funds
A company may want to use idle funds for new machinery, new plants, an expanded transportation fleet orother fixed assets that can increaseproduction capacity. If a business is amerchandiser, it may choose toinvest in additional warehouse facilities orprepay certain expenses, such as rents and insurance.
With sufficient idle funds, an organization may get better value byshopping for other companies to acquire.
Short-term spending of idle cash can yield long-term cost savings. Idle funds might also be used to buy investment securities, such as stocks and bonds. The income and gains from these investments are a secondary source of company earnings.
Idle funds represent what might be seen as a wasted opportunity, as earning any kind of interest on your money is better than earning nothing.
Example of Company Use of Idle Funds
For instance, abusiness can use idle funds topay downdebt and cutinterest expenses and improvecredit. Anotheralternative is to set up a sinking fund, which is a reserve to retiredebts in annual installments.
If a businessissued callable preferred stock, itcan use the idle funds to redeem the outstanding shares and channel the dividend payouts to common stock investors. A business may alsoapply excess cash to programs that can improve retention, such as bonuses, stock options, profit sharing, and group health care.
Many corporations and shareholders prefer stock buybacks to dividends. In a buyback, the company buys up shares in the secondary market. The attraction is that the tax bill for capital gains goes only to shareholders who choose to sell, while a dividend creates taxable income for all shareholders. Buybacks are also more flexible because the buyer isnot obligated to follow through or continue the program ifcash suddenly dries up. Meanwhile, reducing outstanding shares can boost stock prices, which generally pleasesshareholders.
