What is cash equivalents: Examples, Features & Use in Financial Reporting

Cash equivalents are short-term investments that can be quickly and easily converted into cash with minimal risk. 

Amit, the CFO of FinEdge Payments Pvt. Ltd., needed to ensure his company could survive a sudden downturn. In July 2024, after experiencing delays in customer payments, he used ₹3.5 crore from the firm’s liquid assets to pay employees and vendors. Luckily, FinEdge had already invested in Treasury Bills and marketable securities. 

These were sold within 48 hours with negligible loss in value. Had Amit parked the money in long-term assets like mutual funds, he wouldn’t have been able to meet the payment deadlines.

In this blog, we will explore what cash equivalents are, why they matter in financial reporting, how they are used by fintech and other companies, and the different types, features, and benefits they offer. 

What Are Cash Equivalents?

Cash equivalents are short-term investments that a company can quickly convert into cash, usually within three months or less. These instruments are low-risk and are reported under "Cash and Cash Equivalents" in the current assets section of a company’s balance sheet.

Example: In June 2025, Ravi’s fintech firm had ₹25,00,000 in idle funds. He invested it in Treasury Bills maturing in 60 days. When a vendor demanded urgent payment of ₹20,00,000, he liquidated the T-Bills instantly without any loss. That’s the power of cash equivalents.

Types of Cash Equivalents

Cash equivalents are always low-risk and have a maturity of 3 months or less. They are used when companies want to earn a small return without locking their money for too long.

Common Types of Cash Equivalents:

To understand how businesses and investors manage short-term funds, let’s look at the most common types of cash equivalents and their key features:
 

This table shows that cash equivalents are safe, liquid investments with low risk, making them ideal for managing short-term financial needs.

Example: Suresh, a fintech investor, invested ₹25,00,000 in a commercial paper issued by a tech startup. In just 3 months, he earned a 7% annualised return, which came to around ₹43,750. The best part? He could easily access the funds, just like money in a savings account.

Features of Cash Equivalents

Before we dive into the features, let’s understand why companies, especially in fintech, prefer cash equivalents over regular savings accounts. The main reasons are faster access to money, higher short-term returns, and very low risk.

1. High Liquidity

Cash equivalents are easy to convert into actual cash within 1 to 3 business days. This means if a company needs to pay salaries or settle urgent bills, these funds can be accessed almost instantly.

They are traded in active secondary markets, which ensures that they can be sold without delay or a drop in value. This is why they are placed at the top of the “Current Assets” section in financial reports.

2. Short-Term Nature

These investments usually have a maturity of 3 months or less from the date of purchase. Unlike long-term fixed deposits or bonds, they don’t tie up company funds for years.

There are no strict lock-in periods, which makes them ideal for firms that want to keep their options open or expect unexpected expenses.

3. Low Risk / Volatility

Cash equivalents are considered very safe. Most are issued by governments or large, creditworthy companies.

For example, Treasury Bills (T-Bills) are backed by the Government of India or the U.S. Treasury. In the United States, even a Certificate of Deposit (CD) is insured by the FDIC up to $250,000 per account.

These instruments don’t swing wildly in value like stocks or mutual funds. That’s why they are trusted by conservative investors and CFOs alike.

4. Unrestricted Access

A true cash equivalent must allow easy and penalty-free access to funds. Unlike fixed deposits that may lock in your funds and charge penalties for early withdrawal, cash equivalents such as liquid mutual funds, T-Bills, or redeemable CDs allow withdrawal without much hassle.

Example: Neha, a 31-year-old financial controller at a Mumbai-based fintech firm, handles the company’s ₹10 crore operating reserve. To keep this money safe yet accessible, she splits it across:
 

• ₹4 crore in 91-day Treasury Bills yielding 6.65% per annum
   
• ₹3 crore in liquid mutual funds, available within 1 day
   
• ₹2 crore in redeemable 60-day Certificates of Deposit (CDs) at 6.25%
   
• ₹1 crore in a savings account at 3% interest

In July 2025, when a sudden server failure needed ₹1.5 crore in urgent tech upgrades, Neha liquidated part of the T-Bills and mutual funds within 48 hours, avoiding a costly loan at 12% annual interest.

She often jokes with her team, “Cash equivalents are the ‘Circuit’ to our Munna Bhai, always there when the business gets into a jam.”

What’s Not a Cash Equivalent

Not everything short-term qualifies as a cash equivalent. For an asset to count, it must be easily converted to cash without restriction. 

Here are a few common examples that don’t make the cut:
 

The above examples highlight that not all assets qualify as cash equivalents since many lack immediate liquidity or are restricted in use, making them unsuitable for meeting short-term financial needs.

Example: Vikram, who runs a lending platform, thought ₹1 crore in receivables was as good as cash. But when payments got delayed for over 90 days, he had no choice but to borrow ₹50,00,000 at 14% interest. Just like in "Chak De India", where strategy wins the game, finance too needs smart planning, not assumptions.

Uses of Cash Equivalents

Cash equivalents help fintech and other companies manage their money smartly and safely. These are some of the main ways they are used:
 

1. Paying Short-Term Bills: Companies use them to pay staff salaries, vendor bills, or EMIs when revenue is delayed.
    
2. Emergency Support: In times of sudden trouble, like market crashes or tech outages, cash equivalents act as a safety net.
    
3. Ready for New Projects: Startups often keep cash ready to grab surprise opportunities like new product launches or partnerships.
    
4. Following Rules: RBI rules ask NBFCs to keep some money easily available. Cash equivalents help meet this rule.
    

These uses show that cash equivalents are not just a financial cushion but also a tool for growth, compliance, and smooth daily operations.

Cash Equivalents Use in Fintech Startups:

To see how cash equivalents support real-world businesses, here are a few startup examples that show their practical use:
 

These examples show that startups rely on cash equivalents not only for stability but also to seize opportunities, stay compliant, and maintain trust with employees and customers.

Pros and Cons of Cash Equivalents

Cash equivalents are helpful, but they also have limits. Let’s look at both sides:
 

This table shows that while cash equivalents offer liquidity and safety, they are best suited for short-term needs rather than long-term wealth creation.

Cash vs. Cash Equivalents:

Cash is money you can use right away, while cash equivalents are short-term investments that are almost like cash. The table below highlights their key differences:

From this comparison, it is clear that while cash is useful for everyday expenses, cash equivalents provide slightly better returns for short-term planning without adding much risk.

Example: Kriti, a fintech analyst, kept ₹10,00,000 in her savings account and ₹20,00,000 in money market funds. This way, she earned more interest without losing access to her money. As she said, “Safe like SRK, reliable like Simran.”

Conclusion

Cash equivalents may look boring, but they are the unsung heroes of corporate finance. Whether you’re a fintech startup or an established enterprise, parking your surplus cash in these instruments can ensure financial stability and operational freedom. Think of it like the supporting actor who saves the day, never flashy, always dependable.

FAQs on Cash Equivalents

Q1. Why are cash equivalents important for fintech companies?
They ensure quick access to funds for salaries, vendor payments, and compliance needs without liquidity risk.

Q2. Are liquid mutual funds considered cash equivalents in India?
Yes, but only if they mature within 90 days and can be redeemed without major loss.

Q3. Why do corporates prefer treasury bills over commercial papers as cash equivalents?
Treasury bills carry sovereign risk, making them safer, while commercial papers depend on a company's credit strength.

Q4. Can cryptocurrencies or stablecoins be treated as cash equivalents?
No, due to volatility, lack of regulation, and absence of sovereign backing.

Q5. How are cash equivalents shown in financial reports?
They are reported under Current Assets in the balance sheet, highlighting liquidity strength.

 

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