'Cash Reserves' is explained in detail and with examples in the Accounting edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Cash reserves refer to money which an individual person, a company, or a corporation saves in order to be ready to cover any emergency funding or short term requirements. They can also be utilized to refer to a kind of extremely liquid, short term investment which usually garners a poor rate of return (under three percent in a year).
An example of this would be Fidelity Cash Reserves, one of the Fidelity mutual families of funds particular investments. Sometimes individuals will hold money they need rapid access to in such a fund which can be instantly liquidated on the same day they issue the order. Possessing a major amount in a cash reserve fund provides corporations, companies, individuals, families, or communities with the necessary capability to engage in a significant purchase right away.
There are various reasons why firms wish to maintain some cash reserves. They need to have sufficient money on hand in order to cover all of their costs which may be anticipated or even unanticipated over the short term time-frame. Besides this, they often prefer to have enough cash readily available for such interesting possible investments which could arise with little to no warning.
Though cash is always considered to be the most liquid type of wealth and assets, there are also short term kinds of assets like three month U.S. Treasury bills which investors also deem to be a type of a cash reserve because of the ease and frequency with which they can exchange them and their close proximity to maturity date. Major corporations like Alphabet (Google), General Electric, IBM, and Apple keep enormous cash reserves available. These typically range from fifty billion dollars to one hundred and fifty billion dollars.
At the beginning of 2016, Apple boasted such cash reserve ranging from fifty billion to one hundred fifty billion dollars. At the same time, Alphabet (Google) counted $75.3 billion in their immediate cash on hand reserves. This permitted Google to buy out major corporate purchases like their acquisition of Nest, which they bought for a hefty $3 billion price tag back in 2014.
With banks, governmental oversight agencies require that they maintain a minimum quantity of cash reserves on hand. This is because their operations are critical for the functioning of any economy. In the United States, it is the American Federal Reserve that determines these cash reserve amounts for the banks. In other countries, it is often the national central bank or some other governmental oversight regulator who makes the call.
Banking cash reserves will typically be set as a certain percentage of the banks’ liabilities or net transaction accounts. With those banks which contain in excess of $110.2 million in their net transaction accounts, this amount within the U.S. proves to be 10 percent of such liabilities. This amount became effective on January 1st of 2016. Such bank reserves have to be kept in either deposits at a Federal Reserve Bank or in their own vaults as cash on hand. With euro currency liabilities or time deposits of a non-personal nature, these liabilities are not subjected to such a cash reserve requirement.
Economists and personal finance gurus generally state that individuals are wise to keep minimally sufficient cash on hand to cover from three to six months of expenses in the event they suffer a family emergency. Such an emergency fund is a form of a cash reserve. These reserves would be kept in either their local bank accounts or otherwise in a stable and short term time frame investment which will maintain its value regardless of what happens in the markets. In this way, individuals are able to draw on their own emergency funds or alternatively to sell such investments at a moment’s notice without taking a financial loss. This needs to be the case no matter how the financial investment markets are performing.
Other forms of personal cash reserves could be held in a savings account, checking account, money market account, money market fund, or even CDs and Treasury Bills. For those businesses or individuals who do not plan ahead with enough cash reserves, they may have to instead to fall back on credit, loans, or in some drastic cases, declaring bankruptcy.