UK Accounting Glossary
A company’s cash reserves are the funds available to meet its needs for cash, especially unanticipated needs. What level of cash reserves is sufficient depends on the company. For example, a major airline may need $1.5 billion in cash reserves to fund operations and avoid bankruptcy. Financial analysts use a number of ratios that include cash reserves to assess capital adequacy. While a company with low cash reserves may be able to borrow, the debt service puts more pressure on future cash reserves. If cash reserves are depleted and credit is unavailable the company may default on their debts and be forced into bankruptcy. For an investment company, the term cash reserves takes on another meaning. Assets under management may include large cash reserves as part of the funds investment strategy. For example, a mutual fund might hold cash reserves in excess of what is needed for unanticipated redemptions. Similarly, a hedge fund might hold cash reserves to exploit anticipated arbitrage opportunities. For the individual, cash reserves are the savings or credit held to handle emergencies or other contingencies.
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This glossary post was last updated: 4th February 2020.