Loading the player...

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 cash 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 can be 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 is not expected to be used within a 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 could be 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 situations in which a bank grants 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.

RELATED TERMS
  1. Restricted Fund

    A restricted fund is a reserve of money that can only be used ...
  2. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  3. Cash Per Share

    Cash flow per share is the broadest measure of available cash ...
  4. Restricted Market

    A restricted market is one where trading of a nation’s currency ...
  5. Target Cash Balance

    The target cash balance describes the ideal level of cash that ...
  6. Cash Is King

    Cash is king is a slang phrase reflecting the belief that money ...
Related Articles
  1. Investing

    Analyze cash flow the easy way

    Learn the key components of the cash flow statement, how to analyze and interpret changes in cash, and what improved free cash flow means to shareholders.
  2. Investing

    Types Of Shares: Authorized, Outstanding, Float And Restricted Shares

    A company’s financial statements may refer to multiple types of stock, including authorized, outstanding, float and restricted shares. If a company issues more shares, its outstanding shares ...
  3. Investing

    What Is Cash Flow From Investing Activities?

    Cash flow from investing is listed on a company's cash flow statement and includes any inflows or outflows of cash from a company's long-term investments. 
  4. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  5. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  6. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  7. Taxes

    10 Tax Tips For Stock Options

    Options and restricted stock are a great perk--if you don't get caught in a tax trap. Here's what you need to know.
  8. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  9. Investing

    Cash flow statement: Analyzing cash flow from investing activities

    Here, you'll find an overview of cash flow from investing activities — one of three primary categories in the statement of cash flows.
RELATED FAQS
  1. How should I evaluate a company with negative cash flow investing activities?

    Negative cash flow from investing activities should be evaluated since it could be a warning sign. However, it can also mean ... Read Answer >>
  2. How are cash flow and free cash flow different?

    Both cash flow and free cash flow are financial metrics that measure a company's liquidity, but one shows how effectively ... Read Answer >>
  3. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
  4. How do net income and operating cash flow differ?

    Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
Trading Center