Technical / Accounting
Cash: The Most Liquid Asset on the Balance Sheet
Learn what cash means in finance, what counts as cash and cash equivalents, and why it matters for valuation and financial analysis.
"Cash rules everything around me, C.R.E.A.M., get the money, dollar dollar bill y'all." — Wu-Tang Clan, C.R.E.A.M. (1993)
Concept
Cash is the most liquid asset a company owns—currency on hand plus deposits in bank accounts that can be accessed immediately. In financial statements, it's typically grouped with cash equivalents: short-term, highly liquid investments (maturity under 90 days) that are so close to cash they're treated the same. When you see "Cash and Cash Equivalents" on a balance sheet, you're looking at money the company can deploy tomorrow without selling anything or waiting for anyone to pay.
Intuition
Cash matters because it's the ultimate measure of flexibility. A company with strong cash can:
- Pay obligations without selling assets at a discount or issuing dilutive equity
- Seize opportunities (acquisitions, CapEx) when competitors are capital-constrained
- Survive downturns without triggering covenant breaches or bankruptcy
In valuation, cash is typically added back when bridging from Enterprise Value to Equity Value because an acquirer buying the whole company gets the cash in the till. That's why you subtract cash when going from Equity Value to EV—you're stripping out the asset the acquirer inherits.
Components
What Counts as Cash
What It Is
Actual currency and unrestricted bank deposits. This is money you can spend right now—no conversion, no waiting period, no counterparty approval.
Key Items
- Petty cash: Physical currency in the office
- Checking accounts: Standard operating accounts
- Savings accounts: Still immediately accessible
- Foreign currency: Converted at spot rate on balance sheet date
Key Consideration
Interview Script
Cash is the most liquid asset on a company's balance sheet—currency on hand plus bank deposits that can be accessed immediately, often grouped with cash equivalents like short-term investments maturing within 90 days. It matters because it represents financial flexibility: the ability to pay obligations, seize opportunities, and survive downturns without selling assets or raising dilutive capital. In valuation, cash gets added back when bridging from Enterprise Value to Equity Value because an acquirer buying the business inherits that cash in the till.