Among a business's assets are land, buildings, equipment, inventory and cash. A business that is generating profits has several options for using those profits. It may reinvest them in producing more products or services; it may use them to expand business operations; it may distribute them to equity owners; or it may keep the money as idle cash. Idle cash is typically the least attractive option for a company because idle cash does not, by definition, generate any income.
A money market is a market for short-term investment in government debt. Most money market investments have a term of less than one year, meaning that a business that invests idle cash into a money market will not have that cash tied up for a long period of time and can use it if a more attractive opportunity arises.
Some businesses choose to invest their idle funds in the stock market. The type of investments a business should choose depend on the risk tolerance of the business; however, most companies tend to select relatively low-risk stocks that generate a moderate rate of return. Such stocks do not endanger the company's assets as much as more volatile stocks, but can still generate a positive return.
Distribution to Shareholders
The primary purpose of a business is to earn a profit for its shareholders. With that goal in mind, many companies distribute idle cash to shareholders in the form of a dividend payment. In fact, some companies specify in their articles of incorporation or corporate bylaws that excess profits should be distributed to shareholders, rather than simply held as idle cash.
Many businesses are funded with a combination of debt and equity. Debt financing requires that regular interest payments be made to service the debt. For that reason, many companies use their idle cash to pay off some of their debt and reduce their overall interest rate expenses.