What it means
A balance sheet line reading "cash and cash equivalents" can flatter a business badly. Some of that money may be pledged to a landlord, sitting in escrow pending an acquisition, or held as a minimum balance a lender insists on keeping.
Unrestricted cash strips those amounts out to answer a simpler question: what could we spend tomorrow if we had to? That figure is what drives runway calculations, covenant headroom and the decision on whether next month's payroll is genuinely safe.
Restrictions come in several shapes: legal holds ordered by a court, contractual locks such as escrow accounts, compensating balances and security deposits, and practical traps such as cash in a subsidiary that cannot move it across a border. Anything you cannot move within a normal payment cycle should be treated as restricted, whatever the accounting label says.
Audited accounts usually disclose restricted cash separately, either on the face of the balance sheet or in the notes. Internal management reporting should go further and make unrestricted cash the headline number, because that is the figure decisions are actually made against.
Outsiders do this adjustment for themselves anyway. When a lender calculates net debt or a buyer prices an acquisition, restricted balances are typically excluded from cash, which quietly reduces the value they will put on the business.
Restrictions are not always permanent, which is worth tracking. Escrow amounts release on milestones, deposits return at the end of a lease and compensating balances fall away when a loan is repaid, so a simple schedule of when each restriction lifts is a useful companion to the cash forecast.
In practice
Real-world examples.
Example
A construction firm shows $4,200,000 of cash, of which $1,600,000 is retention money held in project escrow until each contract is signed off. Its unrestricted cash is $2,600,000, which is the only figure the board uses when approving new equipment purchases.
Example
An insurance broker holds $3,900,000 in its accounts, but $3,000,000 of that is client premium money sitting in a segregated account under regulatory rules. Only $900,000 belongs to the business and can be spent, so the broker reports that figure in its own liquidity reporting.
Example
A manufacturer with a $2,300,000 cash balance must maintain a $500,000 minimum deposit under its term loan agreement. Its unrestricted cash of $1,800,000 is what the treasurer uses when deciding whether to pay suppliers early for a discount, because drawing on the deposit would breach the loan agreement and trigger a review.
Formula
Calculation
Unrestricted Cash = Total Cash and Cash Equivalents - Restricted Cash. Cash Runway in months = Unrestricted Cash / Monthly Net Cash Burn.
A growing company reports total cash and equivalents of $8,400,000. Of that, $1,200,000 sits in escrow for a pending acquisition, $450,000 is a security deposit lodged with its landlord, and $350,000 is a compensating balance the bank requires under a loan agreement. Restricted cash is $1,200,000 + $450,000 + $350,000 = $2,000,000, so unrestricted cash is $8,400,000 - $2,000,000 = $6,400,000. At a monthly net burn of $800,000 the true runway is $6,400,000 / $800,000 = 8 months, not the 10.5 months the headline cash balance of $8,400,000 would suggest.Case study
Seen in the real world.
Vellum Robotics is an invented hardware startup used purely as an illustrative example. Its board pack showed $6,600,000 of cash against a monthly net burn of $600,000, which the directors read as eleven months of runway and comfortably enough time to close a Series B round the following spring.
A new non-executive director asked what was in the cash number. It turned out that $1,500,000 sat in escrow against a component supply commitment, $400,000 was a deposit on two leased facilities, and $500,000 was collateral for an equipment finance line, making $2,400,000 restricted in total. Unrestricted cash was therefore $4,200,000, giving $4,200,000 / $600,000 = 7 months of runway.
The four-month difference changed the plan. The company started fundraising immediately rather than after the next product milestone, renegotiated the escrow down as deliveries were made, and rewrote its board reporting so unrestricted cash and runway appeared on the first page every month.
Watch out
Common mistakes.
- Calculating runway from the total cash balance, which can overstate how long a business can survive by months.
- Treating a compensating balance as spendable because it sits in the company's own bank account rather than a third party's.
- Forgetting cash held in overseas subsidiaries that cannot be moved home quickly or without a tax cost.
Questions
People also ask.
Is restricted cash still an asset?
Yes, it remains an asset on the balance sheet, but it is disclosed separately because it cannot be used freely.
Does unrestricted cash include money market funds and short-term deposits?
Generally yes, provided they can be converted to cash quickly and are not pledged to anyone.
How do lenders treat restricted cash in a net debt calculation?
Most exclude it, so restricted balances do not reduce net debt and can make leverage ratios look worse than management expects.
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