What Is Restricted Cash?
Let me explain restricted cash directly: unlike unrestricted cash, which you can use freely for any business need, restricted cash is money set aside for a specific purpose and isn't available for immediate or general use. You'll see it listed separately from cash and cash equivalents on a company's balance sheet, and the reason for the restriction is typically detailed in the notes to the financial statements. Common reasons include setting it aside for debt reduction or capital investments.
Key Takeaways
- Restricted cash isn't freely available for spending or investing, unlike unrestricted cash.
- It refers to money held for a specific purpose, not for immediate or general business use.
- This cash appears separately on the balance sheet, with its purpose noted in the financial footnotes.
- It can act as collateral for loans or support capital expenditures like factory upgrades or equipment buys.
Understanding Restricted Cash
When I talk about restricted cash, I'm referring to funds that companies hold aside specifically for things like a major purchase or to repay a loan or debt. You can't use this cash for other purposes—it's locked in for that designated use. Depending on when it's expected to be used, it's classified as either a current asset (if within one year) or a non-current asset (if longer-term). On the balance sheet, it often shows up as 'other restricted cash' or 'other assets' to keep it distinct.
Special Considerations
There are a few variables you should know about handling restricted cash. It might or might not be in a separate bank account dedicated to its purpose, but either way, it's still counted as a cash asset in the financial statements. If the cash isn't spent as planned—say, a company decides against a big expenditure like upgrading a factory—then it can become unrestricted. At that point, you can transfer it to a general account or use it for everyday business needs.
Examples of Restricted Cash
Let me give you two common examples of why companies restrict cash. First, for capital expenditures: companies often set aside restricted cash for big investments, like building a new facility, or as part of a deal with a third party. This ensures the funds are ready when needed. Second, for loan or debt payments: lenders might require restricted cash as partial collateral. You could have to maintain a minimum balance in a designated account, known as a compensating balance, which is a percentage of the loan amount. This is typical for small business loans from banks.
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