Unrestricted cash refers to cash that is readily available to be spent for any purpose and has not been pledged as collateral for a debt obligation or any other restriction.
Often, companies are required to maintain a certain level of cash on their balance sheets to meet debt covenants in case the company defaults or fails to meet its credit obligations. The remaining cash that is not bound by any such restrictions is referred to as unrestricted cash. It is a significant part of an organization’s liquid funds, meaning it is readily accessible. Unrestricted cash is crucial as it indicates how much cash a company has to meet its short-term bills and credit obligations.
Key Takeaways
- Unrestricted cash is cash readily available to be spent for any purpose and is not pledged as collateral for a debt obligation or any other purpose.
- Sometimes, cash might be restricted if it is held aside to secure a bank loan or credit facility.
- Unrestricted cash is listed as a current asset on the balance sheet since it can be used to meet short-term obligations or current liabilities.
Understanding Unrestricted Cash
Unrestricted cash appears on a company’s balance sheet, often under cash and cash equivalents. This category includes money that an organization can spend immediately, meaning it is highly liquid. Unrestricted cash is classified as a current asset because it can be readily accessed and spent in the short term.
Liquidity is vital for companies since it helps them meet short-term debt obligations and pay their vendors and suppliers. These short-term bills and debts due within 90 days are referred to as current liabilities. Unrestricted cash aids companies in ensuring they have enough current assets to cover their current liabilities, a concept known as working capital.
Cash and cash equivalents include the following liquid assets:
- Currency notes, coins, and all cash in a bank account, such as a demand deposit account or a savings account.
- Cash equivalents, such as short-term investments that can easily be converted into cash—for example, a certificate of deposit (CD).
- Some marketable securities, such as U.S. Treasury bills, might also be considered cash equivalents if they have a maturity date of 90 days or less and can be easily liquidated.
When companies report their financial statements, unrestricted cash must be listed under the cash and cash equivalents line item on the balance sheet.
Unrestricted Cash vs. Restricted Cash
Restricted cash is cash held by a company that is not readily available to be spent or used by the company. Cash might be restricted if it is set aside to secure a bank loan or credit facility.
Sometimes financial institutions impose credit covenants that include requirements and restrictions. The cash pledged as collateral for a loan helps protect the bank if the company defaults on the loan or goes bankrupt.
Restricted cash is usually listed separately on the balance sheet. The details explaining why the cash is restricted are generally found in the notes section of the company’s financial statements.
If the restricted cash is for a short-term pledge and is due to be released within a year, it is listed under current assets. However, if the restricted cash must be held for more than one year, it is categorized as a long-term asset or noncurrent asset. Conversely, unrestricted cash is always listed as a current asset and can be used for any purpose as it is not pledged to secure any obligation.
Example of Unrestricted Cash
Let’s consider XYZ Corporation, which manufactures machinery and has borrowed $1 million from a local bank. The bank imposed a debt covenant requiring XYZ to maintain $400,000 in cash at all times.
Below is a portion of the balance sheet for XYZ Corporation:
- The $400,000 in cash required by the debt covenant is listed as restricted cash.
- Cash & cash equivalents total $650,000, which is unrestricted and can be used for any purpose.
Despite the $400,000 being held as restricted cash, XYZ has more than enough unrestricted cash to cover its $300,000 in accounts payable (money owed to suppliers) and $100,000 in short-term debt obligations.
| Balance Sheet Example of Unrestricted and Restricted Cash | |
|---|---|
| Cash & Cash Equivalents | $650,000 |
| Restricted Cash | $400,000 |
| Inventory | $200,000 |
| Accounts Receivable | $50,000 |
| Accounts Payable | $300,000 |
| Short-term Debt | $100,000 |
Related Terms: Restricted Cash, Liquidity, Current Assets, Cash Equivalents, Debt Covenants.
