Cash Reserves

Posted in Finance, Accounting and Economics Terms, Total Reads: 508
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Definition: Cash Reserves

In Finance, cash reserves denotes to two things as discussed below:

• Short term cash reserves: money saved by individuals or company primarily in cash to meet short-term demands or emergency needs.

• Short term investment: This is the type of liquid investment done at low interest, which company or individuals do to have quick access. For example: in some of the mutual funds, this is done.


Its name is derived from the fact that one can derive cash from this reserve quickly. This is also done until a more permanent type of investment opportunity is available.


Examples of cash reserves for a company: 8 month- emergency funds, treasury bills


Examples of cash reserves for individuals: checking account, saving account, money-market funds, money market accounts.


For a company, cash reserves are an important assets as it shows the amount of liquidity the company has at hand. A business that has lack of sufficient cash reserves resorts to credit or may also lead to bankruptcy in extreme cases.

A company’s capital adequacy is assessed by various ratios incorporating cash reserves. Thus it is advisable to the company to maintain its cash reserves.

 

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