If you’re like most people, you carry a debit card, bills, and spare change. While debit cards are the most common, we don’t refer to them as “cash.” Instead, we only call bills and spare change as cash.
However, in the context of a business, “cash” is all of the above — it’s any form of money that can be used to make payments immediately, including debit cards. Moreover, other cash is a term companies use to specify cash holdings that are not used in the company’s daily activities.
This article defines other cash, provides examples, and explains key differences between other cash and “cash equivalents.”
Formally written, cash is defined by three criteria: (1) money on a company’s bank account (2) in the currency of the jurisdiction where the company is headquartered that’s (3) used in daily operations.
Conversely, other cash refers to money that’s immediately available but is NOT on a company’s bank account in the currency of the jurisdiction where the company is headquartered. For example, petty cash and foreign currencies are considered other cash.
Moreover, other cash is not the same as “cash equivalents,” which refer to non-monetary holdings that can be quickly converted into cash or other cash (i.e they’re “liquid”). It may sound complicated, so let’s look at a few examples.
Other Cash: List of Examples
In the vast majority of cases, other cash appears as one of these 6 ways:
- Petty cash. Small amounts of physical cash the company does not hold in a bank, but rather in a vault on company premises. This kind of other cash was important in the past when banks were less safe, but it’s less common today.
- Foreign Currency. Values in foreign currencies held in a bank account (rarely physically) that must be converted to the operating currency to be used. NB: foreign currencies in affiliate holdings abroad are not classified as “other cash” because they’re used in operations in the foreign country.
- Cryptocurrency. Holdings of Bitcoin, Ethereum, Litecoin, or any other cryptocurrency not used as an active trading security.
- Other Cash Receipts. Other cash receipts consist of money owed to the company by a bank or other investment that are “due” in the present but currently have not been transferred. This may sound like a non-cash asset that’s highly liquid, but the difference is that this money is already under the company’s control — it just hasn’t been moved from one bank account to another. The receipt is not subject to market conditions, nor can it be traded as a security. It’s other cash, not an investment.
- Bank drafts. Bank drafts are are payments guaranteed by a bank on behalf of a payer. Like cash receipts, they are considered immediately liquid and accessible like cash on the bank account.
- Money orders. Money orders are like checks, with the additional security that banks guarantee the amount is available on the account of the payer. Because money orders are immediately useable, they’re considered other cash.
Other Cash is Not Cash Equivalents
The term “other cash” is easy to confuse with “cash equivalents.” Cash equivalents are non-cash, highly-liquid assets with maturity dates of less than 90 days, such as treasury bills and stocks. Other cash, however, is always legal tender — just not money held in the reporting currency and held on the company’s account.
Cash Equivalents: List of Examples
- Marketable securities. Marketable securities are assets that can be traded on secondary markets and can be liquidated very quickly. Examples include:
- Treasury bills. Treasury bills are short-term bonds with the US government whose maturity date is less than 1 year.
- Certificates of deposit. A financial agreement offered by banks that provides a premium interest rate to clients who are willing to leave a lump-sum of cash in a savings account, untouched, for a defined period of time.
- Banker’s acceptances. A guarantee from a bank to pay a seller on behalf of a buyer at a future date. It is a way to “guarantee” the exchange between buyer and seller when the relationship is long distance. There is a secondary market for banker’s acceptances, which makes them marketable securities.
- Money market funds. “Money market” is a clever way of saying “highly liquid.” A money market fund, therefore, is investment in a fund that is highly liquid and considered a cash equivalent.
- Cash management pools. Cash management pools are services provided by banks to optimize the distribution of funds across bank accounts within a group, or to treat balances on multiple accounts as a “single” amount for interest calculation purposes. This means cash in these “pools” is equivalent to cash on bank accounts. The reason they’re considered “cash equivalents” is that in some cases the cash is not available while being pooled (but would be shortly thereafter).
- Commercial paper. A commercial paper is a short-term debt instrument that companies issue to fund short-term liabilities. When one company issues the commercial paper, it’s a liability. The company who purchases the commercial paper records it as a “cash equivalent.”
- Short-term government bonds. These are short-term bond holdings that will be paid back to the company in the short future.
Assets Often Confused as Cash Equivalents
Some assets are often confused as cash equivalents, where in reality they are long-term financial assets or other cash. Examples include treasury notes, bank drafts, and money orders:
- Treasury notes. Treasury notes are long-term financial assets. They usually range from 2 to 10 years in maturity, and they should not be confused with treasury bills that have a maturity of less than 1 year.
- Bank drafts. Bank drafts are other cash. A payment guaranteed by a bank on behalf of the payer, bank drafts are considered guaranteed and immediately liquid upon execution.
- Money orders. Money orders are other cash. Similar to a check, except the bank guarantees the availability of funds. This is actually considered cash because it is money owed to the business and guaranteed — just not cashed in.
Inventory: Not a Cash Equivalent
It’s easy to see why some professionals think inventory is a cash equivalent. We’ve defined cash equivalents as short-term and highly liquid. Inventory is a short-term asset that’s highly liquid, but is it a cash equivalent? The answer is no. Inventory is a special case because it requires operational expenses to be converted into cash.
In other words, if the company doesn’t continue to function, the inventory is not liquid. Moreover, in order to generate a profit, the company must sell its inventory for more than it paid, which means the value at-cost of inventory recorded on the balance sheet does not represent its fair value. For these reasons, inventory cannot be considered a cash equivalent.
The concept of cash flow is easiest understood by a cash flow statement (see below), which shows how various business activities produce the balances booked on cash accounts. Specifically, it shows cash movements from operating activities, from investing activities, and from financing activities.
As you can see, cash flow explains how changes in other cash and changes cash equivalents become cash (among other activities).
Other Cash Flow from Investing Activities
On some cash flow statements, you will see a line titled “other cash flow from investing activities.” While it uses the term “other cash,” this item is not related to other cash items. Instead, it refers to minor investments not worth mentioning line-by-line that impact the cash flow.
Other cash, such as cryptocurrency, refers to money that’s immediately available but is NOT on a company’s bank account in the currency of the jurisdiction where the company is headquartered. It’s different from cash equivalents because cash equivalents are not legal tender, though they are highly liquid like other cash.
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