Last Updated October 22, 2025
Effective liquidity management requires more than tracking cash alone. Monitoring cash equivalents gives businesses the flexibility and understanding to meet obligations and seize growth opportunities.
Businesses that maintain healthy levels of cash equivalents can cover short-term debts, strengthen their financial resilience, and remain confident in key operational strategies and decisions. This comprehensive guide outlines cash equivalents in greater detail, including specific examples, how to calculate them, and forecasting techniques.
What Are Cash Equivalents in Business Accounting?
Any asset that can be quickly converted into cash is considered a cash equivalent.
Furthermore, cash equivalents have the following characteristics:
- High liquidity: Cash equivalents can be quickly and easily converted to cash.
- Unrestricted access: They can be accessed or liquidated without significant limitations.
- Short terms: They can typically be liquidated in 90 days or less, starting at the business’s point of investment.
- Low risk: While no investment is truly risk-free, cash equivalents are among the least volatile.
First to appear under current assets on the assets portion of a company’s balance sheet, cash equivalents (combined with cash itself) provide key insight into a business’s financial health.
Understanding what falls under cash equivalents is crucial, because low balances combined with correspondingly high liability amounts can significantly reduce a business’s working capital, signaling greater issues with cash flow.
Examples of Cash Equivalents
Cash equivalents include:
- Money market funds
- Short-term government bonds
- Specific marketable securities
All exemplify the primary characteristics of cash equivalents, including high liquidity, unrestricted maturation in 90 days or less, and low risk.
Marketable securities that qualify as cash equivalents include the following:
- Treasury bills: These short-term bills, often referred to as T-bills, mature in less than 90 days and offer high liquidity with low risk.
- Short-term CDs: Certificates of deposit with maturation dates of 90 days or less qualify as cash equivalents because they provide low-risk, predictable returns.
- Bankers’ acceptances: Guaranteed by a bank, these short-term debt instruments can quickly be converted into cash.
- Commercial paper: Issued by corporations, this unsecured, short-term debt provides high liquidity with little risk involved.
Examples of What Cash Equivalents Do Not Include
Understanding what doesn’t qualify as a cash equivalent is equally important, as it helps you accurately assess liquidity and avoid overestimating immediately available funds.
Below are some examples of assets that are not considered cash equivalents:
- Stocks
- Bonds
- Accounts receivables
- Inventory
- Prepaid assets
- Equity investments
- Collateral used to secure credit
- High-risk CDs that cannot be liquidated without penalties
Separating assets that qualify as cash equivalents from those that don’t sets the stage for recognizing how cash equivalents affect a business’s current financial health and longevity.
Why Are Cash Equivalents Important for Businesses to Keep Track of?
Individual cash equivalents support a business’s financial health by preserving principal capital, providing liquidity with little to no loss, generating stable, predictable returns, and mitigating risk effectively. As a whole, they’re important to know for successful working capital management.
Reporting cash and cash equivalents in a cash flow statement helps businesses better manage their finances by accommodating current liabilities and strategically planning for future obligations. Business owners are better able to understand if they can meet short-term obligations, shore up emergency funds, maximize potential future growth opportunities, and meet applicable lender requirements.
In addition to knowing cash equivalents, effective working capital analysis includes tracking the following:
- Cash turnover ratio
- Cash ratio
- Current ratio
How to Calculate Cash Plus Cash Equivalents
Cash and cash equivalents represent the total of a business’s cash on hand, cash in bank accounts, and short-term, highly liquid investments.
On the cash flow statement, they are reported together as a single line item, reflecting the company’s total liquid resources:
Cash and Cash Equivalents Formula
Cash and Cash Equivalents = Cash on Hand + Cash in Bank + Short-Term Investments
Calculating cash and cash equivalents provides a clear snapshot of a company’s immediate liquidity and helps inform key management decisions. For instance, a company facing an unexpected expense for replacement equipment can assess its ability to purchase or finance the acquisition based on its cash equivalents. This calculation also serves as a foundation for strategic planning and financial forecasting.
Where to Find Cash Equivalents on a Balance Sheet
Cash and cash equivalents in a balance sheet are listed under current assets, typically at the top of the list above accounts receivable, inventory, and other liquid assets. Investors, lenders, analysts, and business owners use these figures to assess a company’s ability to cover obligations and manage cash flow effectively.
Locating cash equivalents on a balance sheet can help you identify the scale of a company’s readily accessible assets and understand how resources are allocated among highly liquid investments. These quantifiable amounts also reflect the business’s approach to preserving capital, managing risk, and, ultimately, maintaining long-term financial stability.
How to Forecast Cash Equivalents
Forecasting cash and cash equivalents enables business owners to make more informed decisions based on anticipated cash flow in the near future. A projected balance sheet incorporates these forecasts to help stakeholders visualize expected assets and liabilities, enabling them to strategize accordingly.
In addition, monitoring fluctuations in cash equivalents provides valuable insight into a company’s liquidity trends. By analyzing these changes, businesses can better anticipate periods of varying cash flow, adjusting investment and spending plans while also informing financial forecasts.
In-Summary: Cash Equivalents
Cash equivalents are a key indicator of financial well-being and a cornerstone of a successful business. When managed effectively, these assets can empower your business to maintain operational flexibility, reduce risk, and—perhaps most importantly—seize growth opportunities the moment they arise. By leveraging robust cash equivalents, you can build resilience into your business plan and thrive at scale.
Cash Equivalents FAQs
Are cash equivalents a current asset?
Yes, along with cash, cash equivalents are listed on a business’s balance sheet as a current asset based on their high level of liquidity and ease of conversion into cash.
Are short-term investments considered cash equivalents?
Yes, short-term investments can be considered cash equivalents so long as they are highly liquid, mature in three months or less, and can readily be converted into cash.
Are marketable securities cash equivalents?
Yes, marketable securities, such as T-bills, commercial paper, and bankers’ acceptances, fall into the category of cash equivalents.
Are treasury bills cash equivalents?
Yes, treasury bills qualify as cash equivalents based on their low risk, shorter terms, high liquidity, and ability to be converted into cash quickly.
Are accounts receivable cash equivalents?
No, accounts receivable aren’t considered cash equivalents because payments are neither guaranteed nor always immediate.
Are certificates of deposit (CDs) cash equivalents?
Only certificates of deposit (CDs) with maturity dates of 90 days or less can be considered cash equivalents. Short-term CDs must also be low risk and free from early withdrawal penalties that significantly reduce the return on investment.
Are bonds cash equivalents?
Generally speaking, bonds aren’t considered cash equivalents. However, short-term government bonds with maturity dates of less than 90 days do qualify as cash equivalents because they’re highly liquid and considered low risk.
Are stocks considered cash equivalents?
Stocks and bonds aren’t considered cash equivalents, but together, these three items make up the three main asset classes of a business.
Are money market funds cash equivalents?
Yes, money market funds qualify as cash equivalents based on their high liquidity, low volatility, and shorter terms.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
