What Does Unencumbered Cash Mean?

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Close-up of hands on top of company's spending binders
Close-up of hands on top of company's spending binders (Image: Heiko Küverling/iStock/Getty Images)

Large corporations employ accounting departments or entire firms to keep their books, but in small businesses, the boss or a trusted employee often keeps track of bills, payments and cash flow. If you're one of those small business bookkeepers, you'll need to work with a CPA at tax time, on reports and whenever an official accounting is required. If you understand basic accounting terms, you'll probably communicate more effectively.

Encumbrances

A debt or expense can be an encumbrance for your business. Overhead, cost of raw materials, transportation, discounts, interest on loans and payment on principal all limit profits on a product. When payment comes, these encumbrances must be subtracted from the income that results from the sale. What remains is an unencumbered asset.

Unencumbered Cash

“Cash,” as accountants use the term, is a name for an asset account that contains currency, coins, money orders, checking account balances and, in some states, specific government securities with a term of less than one year. It does not, however include loan or mortgage proceeds, which must be paid back with interest. Unencumbered cash is any cash asset that is not or is not anticipated to be needed to pay costs associated with the business. It is money that can be re-directed to unanticipated needs, directed to new development, or counted with other assets when profits are tallied.

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