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.
Free Cash
Definition
Free cash refers to the cash that a company can use for any purpose at any time and is not pledged as collateral for debt or other uses. It is the portion of cash remaining after meeting debt covenant requirements, meaning it can be used flexibly.
Origin
The concept of free cash originated in corporate financial management, particularly when companies need to ensure sufficient liquidity to meet short-term debt and operational needs. As corporate financing and debt management became more complex, managing free cash became increasingly important.
Categories and Characteristics
Free cash can be categorized as follows:
- Operational Free Cash: Used for daily operations and paying short-term bills.
- Investment Free Cash: Used for investment opportunities such as acquisitions, expansions, or capital expenditures.
- Reserve Free Cash: Held as a contingency reserve to handle unexpected events or market fluctuations.
The main characteristics of free cash include:
- High Liquidity: Can be quickly used for payments or investments.
- Flexibility: The company can allocate this cash as needed.
- Safety: Not pledged or used as collateral, reducing financial risk.
Specific Cases
Case 1: A tech company has $5 million in free cash after meeting all debt covenant requirements. The company decides to use this cash for R&D to maintain market competitiveness.
Case 2: A retail company has $2 million in free cash at the end of the quarter. The company decides to use this cash for stock buybacks to enhance shareholder value.
Common Questions
Q: What is the difference between free cash and cash flow?
A: Free cash is the remaining cash after meeting all debt covenant requirements, while cash flow refers to the inflow and outflow of cash over a certain period.
Q: Why is free cash important for a company?
A: Free cash shows how much cash a company has available to flexibly use for paying short-term bills, investment opportunities, or handling unexpected events.
