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.
FAQs
Idle cash refers to funds that a business or individual has on hand but is not currently using for day-to-day operations or investments. It can take the form of cash on hand, savings accounts, or money market funds.
How do you use idle money? ›
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.
What is the meaning of idle funds? ›
From Longman Business Dictionary ˌidle ˈmoney British English money that is not earning interestSpeculators prefer to hold idle money in the knowledge that, if they wait, the rate of interest will go up again. → money.
What is idle cash used for? ›
Idle cash is money that is not invested, used for living expenses or set aside for specific upcoming purchases. Due to factors such as inflation and rising costs of goods and services, cash that is not exposed to upside or used to gain yield, is lost potential.
What is an example of a fund of funds? ›
There are different kinds of FOFs, with each type acting on a different investment scheme. A FOF may be structured as a mutual fund, a hedge fund, a private equity fund, or an investment trust. The FOF may be fettered, meaning it only invests in portfolios managed by one investment company.
Is idle money money? ›
What is Idle Cash? Idle cash is, as the phrase implies, cash that is idle or is not being used in a way that can increase the value of a business. It means that the cash is not earning interest from sitting in savings or a checking account, and is not generating a profit in the form of asset purchases or investments.
How to put idle cash to work? ›
Start by putting your cash to work: Open a high-yield savings account or money market account, like Comerica's premium commercial money market account. These account types typically offer higher interest rates than traditional savings accounts, allowing your idle cash to earn more money over time.
How should I use my money? ›
Try the 50/30/20 rule as a simple budgeting framework. Allow up to 50% of your income for needs, including debt minimums. Leave 30% of your income for wants. Commit 20% of your income to savings and debt repayment beyond minimums.
Why is IDLE important? ›
Ultimately, when we set aside time to genuinely do nothing and savour the moment, we find a balance between work and leisure. This prevents us from becoming work-focused to an extreme or being overly idle.
What is IDLE status mean? ›
An idle status is automatically applied when someone hasn't closed or interacted with the app in at least 5 minutes. To change your Discord status, click or tap your profile picture and choose Online, Idle, Do Not Disturb, or Invisible.
If someone calls you idle, it either means they think you don't have enough to do or that you're just plain lazy. Idle can also mean having no value or purpose: idle rumors are rumors that people make up when they're bored, but have no grounding in fact.
What is the disadvantage of idle cash? ›
First and foremost, keeping large amounts of cash reserves means that those funds are not being invested, which can result in missed opportunities for growth and profit. In addition, idle funds can be subject to inflation risk, meaning that the value of those funds will decrease over time due to inflation.
Where should I put my idle money? ›
7 places to save your extra money
- High-yield savings account.
- Certificate of deposit (CD)
- Money market account.
- Checking account.
- Treasury bills.
- Short-term bonds.
- Riskier options: Stocks, real estate and gold.
Internal sources of funds are those that are generated inside the business. A business, for example, can generate funds internally by speeding collection of receivables, disposing of surplus inventories and increasing its profit.
What are three types of funds? ›
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary.
