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. In today's fast-paced economy, managing idle cash is more important than ever. Having a plan for idle cash ensures that funds are being put to work for the business or individual, rather than losing value due to inflation or opportunity costs.
Types of Idle Cash
There are two types of idle cash, short-term and long-term. Short-term idle cash is cash that a business or individual expects to use within the next year. Long-term idle cash, on the other hand, is cash that will not be needed for at least a year. The difference between the two types of idle cash is important to understand when developing a cash management strategy.
Reasons for Idle Cash
There are several reasons for idle cash, some of which are necessary for running a business or managing personal finances. For example, keeping cash on hand for unexpected expenses is a common practice. In addition large inflows of capital after a successful fundraise can also lead to idle cash. However, it's important to be aware of the reasons for having idle cash and take steps to put those funds to work.
The Costs of Idle Cash
Idle cash can come at a significant cost to businesses and individuals. Inflation is one cost to consider, as cash loses value over time when it is not invested. Additionally, the opportunity cost of not investing idle cash is another important factor to consider. When cash is not invested, it is not earning a return. This means that businesses and individuals are losing potential income that could be generated by those funds.
Strategies for Managing Idle Cash
The key to managing idle cash is to have a plan. There are several strategies for managing idle cash, depending on whether the cash is short-term or long-term.
Short-Term Idle Cash Management
For short-term idle cash, options include high-yield savings accounts, certificates of deposit, and short-term bonds. These options offer relatively low risk and can provide a modest return on investment.
Long-Term Idle Cash Management
For long-term idle cash, businesses and individuals may want to consider investing in dividend-paying stocks, real estate investment trusts, or bonds. These options offer the potential for higher returns, but they also come with a higher degree of risk.
In today's economy, having idle cash is almost unavoidable. However, with a solid idle cash management plan, businesses and individuals can minimize the costs of having idle cash and make the most of their funds.
It's important to understand the types of idle cash, reasons for it and potential costs. Having a plan in place for both short-term and long-term idle cash is essential. Additionally, it's important to review and optimize idle cash management strategy regularly, that way businesses or individual can make sure that their funds are working as hard as possible for them.
In conclusion, idle cash management is an important aspect of business cash management that should not be overlooked. Business owners and individuals should take the time to understand their idle cash and develop a strategy for putting it to work. By investing idle cash, they can reduce the costs of idle cash and increase their financial returns.