Idle Cash

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 when the business is low ,  the cash resources are  held on the bank account and business safes.

Idle cash is therefore 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. Most of the reported cash frauds have involved stealing of  idle cash held by organizations in either the office  safes or in the bank  accounts. Prudent investment of idle cash can  in a way  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. The organization could also  end up losing  it  through frauds.

About The Author

John Muhaise-Bikalemesa (JMB), a Certified Public Accountant , with over 35 years’ experience in business strategy, capacity building, business risk management , diagnostic studies, tax advisory, project management, due diligence and feasibility studies, business plan development, capital raising, business and share valuations, business development, assurance services , institutional development and diagnostic studies across various sectors. John has traveled widely across Africa and provided strategic and thought leadership direction to various organisations in Africa and beyond.

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