Cash and Cash Equivalents: Importance and Examples

Cash and cash equivalents are the foundation of a company’s liquidity position. They represent how much immediately available money a business holds to meet short-term needs. Whether you are an investor, a lender, or a business owner, understanding this figure is essential to assess financial stability.

In this blog, we explore what are cash and cash equivalents, why they matter, how to calculate cash and cash equivalents, and look at real-world examples, particularly in the Indian context.

What are Cash and Cash Equivalents

Cash and cash equivalents, often referred to as CCE, include assets that are either cash or can be quickly turned into cash. According to Indian Accounting Standard (Ind-AS) 7 – Statement of Cash Flows – these are highly liquid investments with short maturities, usually less than three months, and with minimal risk of value fluctuations.

Cash includes:

• Physical currency such as ₹500 and ₹2000 notes and coins

• Demand deposits with banks such as SBI, ICICI, Axis Bank, and HDFC

• Cheques and petty cash maintained at office locations

Cash equivalents meaning refers to investments that meet specific criteria:

• Treasury Bills issued by the Reserve Bank of India

• Commercial Papers, often used by Indian corporates

• Money Market Mutual Funds with short-term liquidity goals

• Government Bonds with less than three months maturity

• Fixed Deposits with banks such as IDFC or Kotak maturing within 90 days

Large companies like Reliance and small businesses alike rely on these instruments to manage day-to-day liquidity while preserving capital.

Why Are Cash Equivalents Important?

Cash equivalents play a major role in evaluating a company’s financial readiness. Here is why businesses and analysts focus so much on this metric:

• Liquidity Measure: The cash and cash equivalents balance sheet figure shows whether a business can meet its short-term obligations. A high level offers comfort to stakeholders.

• Operational Stability: Cash is essential for routine payments such as salaries, rent, electricity, and vendor dues.

• Readiness for Opportunity: Companies with good liquidity can seize investment or expansion opportunities quickly.

• Creditworthiness: Banks and NBFCs evaluate CCE before granting working capital loans, especially to MSMEs and exporters.

In India, businesses involved in exports often maintain strong CCE levels to deal with currency volatility and delayed receivables from overseas customers.

What is the Nature of Cash Equivalents?

Understanding the types of cash equivalents is important when analysing short-term financial instruments. They share certain traits that make them fit the definition of cash equivalents.

• High Liquidity: Instruments like Treasury Bills and Commercial Papers can be easily sold in Indian money markets.

• Short Maturity: Maturity does not exceed 90 days, making them ideal for short-term financial management.

• Low Risk: These instruments carry minimal risk of value fluctuation and are usually backed by governments or highly rated corporates.

• Easy Transferability: They can be transferred without significant loss of value, even under tight market conditions.

It is important to note that not all short-term investments qualify as cash equivalents. Equity shares, long-term FDs, or corporate bonds with longer maturities do not fall under this category due to price volatility and liquidity constraints.

How to Calculate and Interpret CCE

The CCE formula is fairly simple and widely used in balance sheet analysis. It combines various liquid assets to reflect the total funds immediately available.

CCE Formula:

Example Calculation:

Interpretation:

• A high CCE amount generally means that the company is financially stable and can meet short-term obligations with ease.

• However, if a business holds excessive cash without investing it wisely, it may signal missed growth opportunities.

• A low CCE could indicate cash flow risks, especially in sectors where payments are often delayed, such as construction or retail.

In India, financial institutions use CCE to compute liquidity ratios such as the Quick Ratio or the Current Ratio to assess loan eligibility.

What are Examples of Cash and Cash Equivalents?

To better understand this concept, let us look at some examples of cash and cash equivalents commonly used in Indian business environments.

Common Examples:

• Cash: Physical notes and coins, current accounts in banks like SBI and ICICI

• Bank Deposits: Current and savings accounts with HDFC, Kotak, or Axis Bank

• Treasury Bills: Short-term sovereign debt with maturity of less than three months

• Commercial Papers: Instruments issued by large Indian firms like Infosys, Wipro, or Tata Motors

• Money Market Mutual Funds: Liquid funds managed by HDFC Mutual Fund, Nippon India, or SBI Mutual Fund

• Short-term Fixed Deposits: FDs maturing within 60 to 90 days from banks such as IDFC First or Federal Bank

Scenario-Based Examples:

• A company receives ₹5,00,000. It keeps ₹3,00,000 in an HDFC current account and places ₹2,00,000 in a 60-day fixed deposit. Both amounts count as cash and cash equivalents.

• A Bengaluru-based tech startup receives investor funding. To manage cash burn efficiently, it invests ₹10,00,000 in an SBI Liquid Fund. Since this investment matures in 30 days with low risk, it qualifies as a cash equivalent.

These examples highlight how businesses of all sizes use CCE for stability, efficiency, and agility in financial operations.

Conclusion

Cash and cash equivalents are a vital part of any business’s financial strategy. They offer a real-time picture of how well a company can handle its short-term needs, invest in new opportunities, and meet unforeseen challenges. Whether it is making GST payments, paying salaries, or acquiring a smaller firm, CCE plays a major role in day-to-day and strategic financial decisions.

Major Indian companies like Infosys had over ₹69,000 crore in cash and cash equivalents as of 2024. This level of liquidity provides the flexibility to innovate, make acquisitions, and expand globally. On the other hand, MSMEs often depend on a strong CCE position to survive volatile cash flow cycles and fund seasonal growth.

While holding too little CCE can expose a company to risk, holding too much without deployment might hurt returns. Finding the right balance is key. An efficient cash and cash equivalents balance sheet reflects sound financial management, supports creditworthiness, and improves decision-making for both internal and external stakeholders.