What Is Unrestricted Cash?

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 other purpose.

Often, to satisfy debt covenants, companies must maintain a certain level of cash on their balance sheets in case the company defaults or goes into nonpayment of their credit obligations.

The remaining cash that exceeds the covenant requirements is referred to as unrestricted cash. Unrestricted cash is a part of an organization's liquid funds, meaning it's easily accessible. Unrestricted cash is important since it shows how much cash a company has to meet its short-term bills and credit obligations.

Key Takeaways

  • Unrestricted cash is cash that's readily available to be spent for any purpose and has not been pledged as collateral for a debt obligation or other purpose.
  • Sometimes, cash might be restricted if the money is required to be 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 satisfy its short-term obligations or current liabilities.

Understanding Unrestricted Cash

Unrestricted cash is listed on a company's balance sheet. However, it is typically listed as cash and cash equivalents. Unrestricted cash or cash and cash equivalents represent the money that an organization can spend today, meaning the money is readily available—or liquid. Unrestricted cash is considered a current asset on the balance sheet since it can be readily accessed and spent in the short term.

Liquidity is critical to companies since having enough cash available can help a company meet its short-term debt obligations and pay its vendors and suppliers. These short-term debt obligations and bills that are due within 90 days are called current liabilities. Unrestricted cash helps companies ensure that they have enough current assets to cover their current liabilities, called working capital.

Cash and cash equivalents include the following liquid assets:

  • Currency notes, coins, and all cash being held in a bank account, such as a demand deposit account or a savings account
  • Cash equivalents are short-term investments that can easily be converted into cash. For example, a certificate of deposit might be considered a cash equivalent.
  • Some marketable securities, such as U.S. Treasury bills, might be considered cash equivalents if they can be easily liquidated and have a maturity date of 90 days or less.

When companies report their financial statements, unrestricted cash must be listed in the cash and cash equivalents line item of a company's 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 the money is required to be held aside to secure a bank loan or credit facility.

Sometimes financial institutions impose credit covenants, which include requirements and restrictions. The cash pledged as collateral for a loan helps protect the bank in the event the company goes bankrupt or defaults on the loan.

Restricted cash is typically listed as a separate line item on the balance sheet. The description or details explaining why the cash is restricted is usually found in the notes section of a company's financial statements.

If the restricted cash is for a short-term pledge, meaning it's due to expire in less than one year, the line item would be located under current assets. However, if the restricted cash must be held for more than one year, it would be listed under long-term assets—called noncurrent assets. Conversely, unrestricted cash is listed as a current asset and can be used for any purpose since it has not been pledged to secure an obligation.

Example of Unrestricted Cash

For example, XYZ Corporation manufactures machinery and borrowed $1 million from the local bank. The bank required a debt covenant in which XYZ must hold $400,000 in cash on hand at all times.

Below is a portion of the balance sheet for XYZ corporation.

  • The $400,000 in cash specified 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 $400,000 being held as restricted cash, XYZ has more than enough unrestricted cash to cover the $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
Balance Sheet Portion   
 
Current Assets
Cash & Cash Equivalents $650,000
Restricted Cash $400,000
Inventory $200,000
Accounts Receivable $50,000
Current Liabilities
Accounts Payable $300,000
Short-term Debt $100,000