What is unrestricted cash?
We can say that unrestricted cash means the cash that we can spend immediately for any reason. But what sets it apart from others? It was not pledged for any purpose, such as debt obligations. Companies try to maintain the cash level on their balance sheet to satisfy debt covenants. They do this in case they decide to default or become nonpayment for their credit obligations.
In simple terms, unrestricted cash refers to the money that was left from the exceeding covenant requirements. It is very liquid because it is easily converted into cash. It helps entities know how much cash they still need to pay for their short-term responsibilities, such as bills and credit obligations.
Tell me more about unrestricted cash.
If we look at the company balance sheet, we will see that unrestricted cash belongs under the “Cash and Cash equivalent” classification or CCE. It means that CCE or unrestricted cash refers to money that can be spent immediately. It is the money that is available anytime because they are liquid. And since unrestricted cash falls under CCE, it is also a current asset because it can be easily accessed to pay for short-term obligations. Unrestricted cash is listed under the CCE line item in a company’s balance sheet during financial statement reports.
Unrestricted cash, Cash and Cash equivalents, and liquidity
We know that liquidity is helpful in many terms. But since we are talking about CCE and unrestricted cash, we say it is important because companies need available cash to pay for their short-term debts obligations, vendors, suppliers, and workers. What are short-term debt obligations and bills? As the name suggests, they are due for not more than three months, and some also call them current liabilities. Have you heard of the term working capital? This term is also related to what we are talking about today. It involves the unrestricted cash that companies need to maintain to have enough current assets that can pay for their current liabilities.
What can we consider as cash and cash equivalents?
We already said that cash and cash equivalents are liquid assets. But what are these assets specifically? We have cash, currency notes, coins, and the money kept in a bank account like demand deposit and savings account. There are also cash equivalents that are short-term and can be converted to cash immediately. For example, certificates of deposits can be considered as cash equivalents depending on their maturity. We also have marketable securities like Treasury bills that can fall under cash equivalents if they are liquid enough and mature within 90 days or less.
What sets unrestricted cash apart from restricted cash?
Unlike unrestricted cash, restricted cash is not readily available to be used. It may be money that should be held for bank loans and credit facilities. There are financial institutions that make credit covenants and may sometimes come as requirements and restrictions. Cash may be pledged as collateral for loans, so the bank is protected in case the company declares bankruptcy. Some companies tend to default on loans if they experience financial problems.
Unlike unrestricted cash, restricted cash is a separate item on the balance sheet. The restriction is explained in the notes section of the financial statement.
Short-term pledged restricted cash expires in not more than a year. It means that the line item can be found under current assets. If held for more than a year, it would be a long-term asset we call noncurrent assets. On the other hand, unrestricted cash can be a current asset if it has not been pledged for obligations.
