Cash and liquidity
Clear definitions and practical examples to help you understand the numbers and decisions.
Cash equivalents
Cash equivalents are short-term, highly liquid investments held to meet near-term cash commitments, rather than to earn a return over a longer period. They can be converted into known amounts of cash and carry an insignificant risk that their value will change.
Read the explanationRestricted cash
Restricted cash is cash whose use is limited by law, a contract, or a specific arrangement such as a pledge or reserve account. It remains cash, but management cannot use it freely for payroll, suppliers, or a new project.
Read the explanationUnrestricted cash
Unrestricted cash is cash the business can use for ordinary purposes without a legal or contractual restriction. It is the starting point for a liquidity decision, not the final answer: scheduled payments and the company’s minimum cash floor can still reduce what is available for a new commitment.
Read the explanationLiquidity
Liquidity is the ability to obtain enough cash to pay obligations when they fall due. It depends on usable cash, reliable collections, funding that is actually drawable, and the dates of payments. It is different from profitability and long-term solvency.
Read the explanationSolvency
Solvency is the capacity to meet obligations over the longer term after considering assets, liabilities, recurring earnings, and the financing structure. It asks whether the business can support what it owes over time. It is not the same as liquidity, which asks whether the next payment can be made on time.
Read the explanationOperating cash flow
Operating cash flow is cash generated or used by a company’s principal revenue-producing activities. It differs from operating profit because profit includes non-cash items and because receivables, inventory, and payables change when cash is collected or paid.
Read the explanationInvesting cash flow
Investing cash flow records cash paid for or received from long-lived assets and investments, such as equipment purchases or sale proceeds. It is separate from the operating profit effect of depreciation: depreciation records use of an asset over time, while the purchase uses cash when paid.
Read the explanationFinancing cash flow
Financing cash flow records cash received from or paid to lenders and owners, including borrowing, principal repayment, equity issuance, and distributions. It shows how the business is funded; it does not show whether operations produced cash. Classification of interest and dividends can depend on the reporting framework and accounting policy.
Read the explanationGross burn rate
Gross burn rate is the total cash a company spends in a period before deducting cash inflows. This entry uses a stated operating definition: recurring operating cash outflows, normally excluding one-off items unless management deliberately includes them. It is a cash measure, not revenue, expense, or EBITDA.
Read the explanationNet burn rate
Net burn rate is the net reduction in cash during a period under a stated operating definition: recurring cash outflows minus recurring cash inflows. It is not EBITDA and it is not automatically the total movement in bank cash, because investing, financing, and one-off movements may sit outside the definition.
Read the explanationFunding gap
A funding gap is the amount by which available cash and committed funding fall short of forecast cash needs over a stated period. It is a planning estimate, not a permanent label: its size changes when the timing or amount of collections, payments, and funding changes.
Read the explanationLiquidity headroom
Liquidity headroom is the amount of liquidity a company can use before it reaches a defined minimum cash floor or another binding threshold. Liquidity means cash that is genuinely available to the company, so restricted cash and facilities that cannot yet be drawn should not be counted as if they were spendable.
Read the explanationCash pooling
Cash pooling is a banking and treasury arrangement that lets companies in the same group centralise cash or offset account balances. Its purpose is to reduce idle cash and external borrowing while giving the group a clearer view of its daily position. It does not erase the fact that each subsidiary is a separate legal entity with its own obligations.
Read the explanationDirect cash-flow method
The direct cash-flow method presents cash from operating activities as major classes of money received and paid. Typical lines include cash received from customers, cash paid to suppliers, cash paid to employees, and cash paid for taxes or interest when the reporting policy places them in operating activities. It starts with bank and cash movements rather than accounting profit.
Read the explanationIndirect cash-flow method
The indirect cash-flow method starts with a profit measure and reconciles it to cash from operating activities. It adds back expenses that reduced profit without using cash, such as depreciation, and adjusts for changes in operating working-capital balances. An increase in receivables usually reduces operating cash because customers have not yet paid; an increase in payables usually preserves cash because suppliers have not yet been paid.
Read the explanationCash-flow reconciliation
A cash-flow reconciliation is a documented explanation of how opening cash, classified receipts and payments, and identified non-operating movements lead to closing cash. In routine management reporting it also ties the cash forecast or cash-flow report to bank statements and ledger records. It is an evidence trail, not a number inserted to make a schedule add up.
Read the explanationCash budget
A cash budget is a time-phased management plan of expected cash receipts, cash payments, and resulting cash balances. It normally covers weeks or months, but the useful time interval is the one that exposes when commitments fall due. It is not an income statement: it records expected cash dates, which can differ from the dates revenue and expenses are recognised.
Read the explanationTreasury management
Treasury management is the discipline of managing a company’s cash positions, banking, short-term funding, payments, and relevant financial risks. In a smaller company, the finance lead may perform the work; in a larger group, a treasury team coordinates it. The responsibility is not merely to report the bank balance. It is to ensure that the right legal entity has usable money when its obligations fall due, without taking unnecessary funding or counterparty risk.
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