Restricted Cash

Not all cash on a company's books is available for everyday spending. Some may be locked up as security, held for a particular obligation or required by a lender or regulator.

Common examples include cash deposited as collateral for a loan or letter of credit, money held in escrow for a pending transaction, funds that must be used to repay specific debts and customer deposits that must be kept separate.

For example, a company might have total cash of 10 million, of which 2 million must remain in a special account as security under a loan agreement. Only 8 million is freely available.

Restricted cash is usually reported separately from cash and cash equivalents, or clearly identified in the notes, so readers are not misled about how much money the company can actually use. If the restriction will last longer than a year, the restricted cash may be shown as a non-current asset.

When analysing liquidity, investors and lenders typically exclude restricted cash, because it cannot be used to pay suppliers, staff or unexpected expenses.