You may not have considered what to do with excess cash, but idle funds can hinder business development. Not all business owners know how to manage idle funds properly. But it’s crucial — a solid idle cash management plan can hedge against inflation and increase the value of a business.
What is idle cash?
Idle cash refers to funds that aren’t being used. “Cash” can encompass physical, legal tender and cash equivalents, including:
Physical bills or coins stored in a safe or at a business
Cash deposited into a checking or savings account
Short-term investments, certificates of deposit (CDs) and other money market instruments
When left dormant, cash doesn’t earn interest or generate a profit. It can even decrease in value due to the effects of inflation.
Idle cash has value
Idle cash can deliver value to companies, no matter the size or phase of your business. Consider this example: Suppose you have $500 in a safe. It doesn’t appreciate or gain value when left unused. If your bank pays 2% interest, your $500 could earn interest and generate a profit of $10 in a year. Here, your $500 cash has lost $10 from an opportunity cost perspective.
This is just one example. If you have the proper cash management plan, your unused cash can increase purchasing power and add value to your business.
Idle cash management isn’t a financial trend — idle funds can strengthen your business or reward your shareholders if you:
Buy assets: Instead of letting your money sit around, put it to use by buying property, equipment and other assets that can help you turn a profit.
Cut costs: Pay down debt to cut interest expenses or lower the cost of personnel turnover by investing in bonuses, stock options or other programs to improve employee retention.
Pay dividends: Excess retained earnings can be a red flag for the Internal Revenue Service (IRS). Consider paying out dividends to distribute some of your company’s wealth.
Buyback stock: You could buy up the shares and potentially increase stock prices if you prefer stock buybacks to dividends.
Invest: Your idle cash can be invested in liquid, short term income funds to generate dividends and yield that is potentially much higher than what the bank is paying.
As you can see, many options are available for small business owners to put their idle funds into motion.
Maximize the impact of idle cash
If you have no obvious uses for your cash hoard, you still have plenty of options to put it to work.
Depositing your idle cash into a checking account is the most liquid option. You can withdraw your money at a moment’s notice. However, banks often pay the lowest interest rates on cash that sits in a checking account, and many pay zero interest.
Savings
The next best option for your idle funds is a savings account. You typically earn a rate slightly higher than a checking account. Still, it isn’t much — the national average savings deposit rate as of March 2022 is 0.06%, according to the Federal Deposit Insurance Corporation.
CDs
CDs, short for certificates of deposit, tie up your cash for a specified period. It can pay more interest than a standard savings or checking account, but it isn’t much. You might see a 0.09% to 0.13% higher return if you commit to a 12- or 24-month CD according to the Federal Deposit Insurance Corporation.
Treasury Account
A treasury account is likely the best idle cash management option for business owners. Large companies have utilized the benefits for decades, but SMBs can tap into the gains thanks to Treasury as a Service (TaaS) technology.
TaaS is available for businesses in various stages, from seed companies to established organizations. At Treasure, you can maximize your idle cash to earn 15x more than you can at your bank and access your funds on your terms — with daily and T+2 liquidity.*
Manage your idle cash today
If your business has excess funds, it's time to look closely at your idle cash management plan. But it shouldn’t be a one-time thing. Idle funds are best managed with an ongoing strategy. That’s where Treasure can help.
Treasure can be an integral part of your company’s financial goals. The TaaS platform from Treasure is the ultimate cash management plan for your business and offers 15x more than the typical business bank account, daily liquidity and up to $3.5M in FDIC insurance.* Open a Treasure account today to realize the value of your idle cash.
*As an incentive Treasure will apply a monthly payment to your Treasure Cash account of 0.45% annualized based on the balance of your account. The payment is not bank interest and is not an annual percentage yield.
*Based on average bank account rates as of 3/31/2022. Source: Bankrate.
If you have an emergency fund and no high-interest debt, then you might be better off investing idle money. Some debt, like a mortgage, could potentially be beneficial to your net worth, and your mortgage rate might be lower than what you could get from investments.
The cash is simply sitting in a form where it does not appreciate. In fact, due to inflation, the real-adjusted returns of idle cash may be negative. In other words, not only does idle cash not appreciate, it can actually lose value, due to inflation.
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.
An emergency fund of six months will help you face potential financial hardships. In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.
CDs. A certificate of deposit, or CD, is another type of deposit account that is federally insured for $250,000 per depositor per bank — meaning your cash is safe up to that limit. CDs differ from high-yield savings, however, in that they're not as accessible.
Significant idle cash surpluses are considered a bad investment since cash in a checking or savings account receives little to no interest. Therefore, investing in short term securities or cash equivalents yield greater interest.
More often than not, a cash-rich company runs the risk of being careless. The company may fall prey to sloppy habits, including inadequate control of spending and an unwillingness to continually prune growing expenses. Large cash holdings also remove some of the pressure on management to perform.
Cash management encompasses how a company manages its operations or business activities, financial investments, and financing activities. A company has to generate adequate cash flow from its business in order to survive, meaning it is able to cover its expenses, repay investors, and expand the business.
This involves establishing a system for tracking cash inflows and outflows, such as maintaining a daily cash log or using accounting software. 2) Creating cash flow forecasts - Creating cash flow forecasts is another essential practice of cash management.
However, if you just leave your cash sitting in your bank account, it will likely lose value over time due to inflation. One way to prevent this is to invest your idle cash in a money market fund.
Money pools most often involve a group of family members, coworkers, or close friends who agree to pool their money equally through monthly (or regular) contributions to a fund. The amount agreed upon might be small, say $50 per month, or large, like $200 every two weeks, for a fixed period of time.
“Some of your funds should be positioned in cash instruments to meet more immediate needs, but money that is intended to achieve long-term objectives should be invested in assets like stocks and bonds to work toward those goals.”
If you're planning your finances for the longer term – five years or more – investing offers the chance to get your money working harder because you should get better returns than you could from cash.
A healthy cash reserve can serve multiple purposes.Beyond acting as a financial safety net, it can be used to fund unexpected growth opportunities, helping you avoid taking on new debt. The ideal reserve amount will vary based on a few unique factors, including your liquidity ratio and your cash flow needs.
Introduction: My name is Duane Harber, I am a modern, clever, handsome, fair, agreeable, inexpensive, beautiful person who loves writing and wants to share my knowledge and understanding with you.
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