Restricted cash accounts: money can be in the bank without being available to spend

Restricted cash is money held in a bank or investment account that the company cannot freely use because of a contract, lender requirement, trust, regulation or transaction structure. Treasury should separate it from ordinary operating cash so directors do not make spending decisions from a headline balance that overstates available liquidity.

Restrictions can come from several sources

Debt-service reserve accounts, escrow accounts, collateral deposits, client money and cash supporting guarantees can all be restricted for different reasons.

Tag the reason, legal owner and release condition in the bank-account register. Not all restricted balances have the same risk or accounting treatment.

Lenders can control reserve or collateral accounts

A facility can require minimum cash to remain in a secured account or permit withdrawals only for debt service.

Management should not count that balance when deciding how much is available for payroll or dividends unless the lender has actually released it.

Client and trust money can belong economically to someone else

Professional firms and trustees can hold money for clients or beneficiaries in designated structures. Those funds are not ordinary company working capital.

Keep them segregated and reconcile the beneficial-owner ledger to the bank. Legal ownership and protection rules depend on the structure.

Transaction escrow can trap cash until conditions are met

Acquisitions, property deals and commercial disputes can place cash in escrow pending completion, warranty claims or another event.

Track expiry, release instructions and who earns interest. An old escrow can remain forgotten long after the underlying business issue ended.

Show restricted and unrestricted cash separately

Board liquidity reports should show gross bank cash, restricted balances and immediately available liquidity. This helps directors see the true operating buffer.

Forecast when restricted cash can become available and whether any release depends on lender consent or legal evidence.

Reconcile restrictions as well as balances

Month-end review should confirm not only that the bank statement agrees but that the classification remains correct.

A collateral account released by the bank should move out of restricted cash promptly, while a newly pledged deposit should not remain reported as free liquidity.

Worked example: a company has £4 million across its banks, but £1.2 million is client money, £800,000 is a lender reserve and £500,000 sits in acquisition escrow. Gross cash is £4 million, while only £1.5 million is immediately available to the company for ordinary operations.

Use a restricted-cash schedule by account, restriction, owner, amount, release date and supporting document. That schedule is more useful to treasury than a chart of bank balances alone.

Review interest earned on restricted balances. Depending on the legal structure, interest can belong to the company, client, trust or secured account. Do not book it automatically as company income without checking the governing agreement.

Worked example: a property company holds £1 million in a tenant-deposit or client structure, £750,000 in a debt-service reserve and £250,000 as collateral for a bank guarantee. The company has £2 million of bank balances but none of that amount may be fully available for ordinary supplier payments. Treasury reporting should make this explicit.

Set release-date alerts. Escrow and collateral restrictions can expire automatically or after evidence is delivered. Without alerts, companies can leave cash restricted for months after the contractual reason ended.

Review whether restricted accounts sit inside the same banking group as operating deposits. Even where deposit-protection treatment differs, counterparty concentration can matter operationally if one bank experiences an outage or restriction.

Keep account naming clear in online banking. Labels such as "Operating", "Client", "DSRA" and "Escrow" reduce the chance an employee accidentally selects the wrong account during a payment run.

At year end, obtain direct bank or custodian evidence for material restricted balances where auditors request it. The restriction can be contractual even when the cash sits in a normal-looking deposit account, so the supporting agreement matters as much as the statement.

Use liquidity ratios that exclude restricted cash unless the definition explicitly permits it. Including unavailable balances can overstate the company's ability to meet short-term obligations and mislead management or lenders.

Include restricted balances in the account-signatory review. A user who has ordinary operating-bank authority may not need access to escrow or lender-controlled accounts, and giving them unnecessary visibility or transfer rights weakens the purpose of segregation.

When a restriction ends, document the release instruction and date. The bank may need a lender, trustee or solicitor authorisation before the cash actually becomes movable, so treasury should not count it as free the moment the commercial condition is satisfied.

For covenant reporting, confirm whether restricted cash is excluded from net debt or liquidity definitions. The accounting classification and lender definition can differ, so treasury should calculate both explicitly rather than assume one treatment applies everywhere.