Restricted Cash

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What is 'Restricted Cash'

Restricted cash, in contrast to cash freely available for a company to spend or invest, refers to money that is held for a specific purpose and therefore not available to the company for immediate or general business use. Restricted cash appears as a separate item from the cash and equivalents listing on a company's balance sheet or other financial statement, and the reason for the cash being restricted is usually disclosed in the accompanying notes to financial statements. Cash is restricted for a number of possible reasons, such as equipment purchases, other capital investments or loan repayment.

BREAKING DOWN 'Restricted Cash'

Restricted cash typically appears noted on a company's balance sheet as either "other restricted cash" or as "other assets."

There are a number of variables to the handling of restricted cash. For example, it may or may not be held in a separate account designated for the purpose for which the cash is restricted. It is classified as a current or noncurrent asset, depending on the time frame within which a company expects to use it. If the restricted cash is expected to be used within one year of the company's most recent balance sheet date, it is classified as a current asset. If it not expected to be used within that one-year time frame, it is classified as a noncurrent asset.

Despite the fact that it may be designated as restricted and held in a special account, restricted cash amounts are still included in a company's financial statements as a cash asset. In the event that the restricted cash is not spent as intended, it may then become unrestricted, regular cash that a company can transfer to a general cash account or spend for general business purposes. For example, a company may hold restricted cash for the purpose of making a large capital expenditure but later decide against making the expenditure. The cash designated as restricted for that purpose is then freed up for the company to spend or invest elsewhere.

Common Uses of Restricted Cash

The most common reasons for a company holding restricted cash are an expected capital expenditure, or as part of an agreement with a third party. Lenders sometimes require a company to hold restricted cash as effectively partial collateral against a loan or line of credit. A bank or other lender may require the company to set up a designated restricted cash account in which the company must maintain a balance, sometimes referred to as a compensating balance, equal to a specified percentage of the credit extended by the bank. This is fairly common practice in a situation such as a bank granting a business loan to the owner of a new small business. Companies also frequently set aside cash designated as restricted in planning for a major investment expenditure.