Idle cash: what it costs, and the threshold at which to act

Cash that sits idle produces no accounting loss. It produces a shortfall, which appears nowhere in the accounts and is therefore never discussed in committee. It is the only significant cost borne by a finance function that appears on no line of the P&L.

The calculation, in three lines

Splitting cash into three pockets

The question is not « should everything be invested » but « what share can genuinely be tied up, and for how long ». Splitting into three pockets answers that directly.

This is the most important point of method: without a cash forecast, the operating pocket is set by feel, and experience shows it is set far above the real need. A forecast does not only anticipate difficulties, it frees up cash wrongly held in waiting.

The special case of foreign currencies

A lasting surplus in a dollar account raises an extra question: invest it in dollars, or convert it. The two routes compare on three elements — the yield in each currency, the cost of converting one way, and whether future payments exist in that currency.

• If future dollar payments exist: keeping and investing in dollars is almost always preferable, since converting and reconverting means paying the FX margin twice.
• If none exist: converting is justified, and the timing of the conversion becomes an FX decision in its own right, better framed by the policy than left to the judgement of the day.

The threshold for action

A simple test: if the after-tax shortfall exceeds the full cost of the time needed to fix it, act. For a company with a stable surplus of EUR 1 million, the after-tax shortfall is around EUR 15,000 a year — far above the few hours required to open a term deposit and set up a ladder.

Below EUR 300,000 of stable surplus, the trade-off becomes debatable and depends on the internal cost of managing it. Above EUR 500,000, inaction is a decision that should be formally owned in committee, not suffered by default.