Idle Funds

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.

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

With sufficient idle funds, an organization may get better value by shopping 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, a business can use idle funds to pay down debt and cut interest expenses and improve credit. Another alternative is to set up a sinking fund, which is a reserve to retire debts in annual installments.

If a business issued callable preferred stock, it can use the idle funds to redeem the outstanding shares and channel the dividend payouts to common stock investors. A business may also apply 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 is not obligated to follow through or continue the program if cash suddenly dries up. Meanwhile, reducing outstanding shares can boost stock prices, which generally pleases shareholders.