Deck 12: Managing Cash Flow

Question 1

Which of the following measures a company's liquidity and its ability to pay its bills and other financial obligations on time?

A)Cash budget
B)Cash flow
C)Cash management
D)All of the above

Answer 1

B

Question 2

Which of the following is not a step in creating a cash budget?

A)Determining an adequate minimum cash balance
B)Forecasting profits
C)Forecasting cash receipts
D)Forecasting cash disbursements

Answer 2

B

Question 3

What factors can drastically affect a company's cash flow?

A)Increased competition
B)Economic swings
C)Normal seasonal variations
D)All of the above

Answer 3

D

Question 4

________ typically lead(s)sales; ________ typically lag(s)sales.

A)Production; receivables
B)Collections; purchases
C)Receipts; production
D)Purchases; collections

Question 5

Solid cash management enables a business owner to:

A)adequately meet the cash demands of the business.
B)avoid retaining unnecessarily large cash balances.
C)stretch the profit-generating power of each dollar the business owns.
D)All of the above

Question 6

Jane is arguing with Joan about how much cash their small retail outlet needs as they prepare their cash budget.Jane feels that with the Christmas season coming,their busiest time,they need more cash available while Joan feels they do not because their sales volume will be up significantly.Jane and Joan are discussing which step of the cash budgeting process?

A)Determining an adequate minimum cash balance
B)Forecasting sales
C)Forecasting cash receipts
D)Forecasting cash disbursements

Question 7

A cash budget is only as accurate as the ________ forecast from which it is derived.

A)profit
B)receivables
C)income
D)sales

Question 8

The fact that the cash budget illustrates the flow of cash in a business helps the owner to:

A)accelerate accounts payable payments.
B)get a seasonal line of credit rather than an annual line of credit.
C)slow accounts receivable payments.
D)track the effects of depreciation and bad debts.

Question 9

It is recommended that new business owners estimate cash disbursements as best they can and then add on another ________.

A)3-4 percent
B)5-10 percent
C)10-25 percent
D)25-35 percent

Question 10

A firm's cash budget should:

A)be prepared on a monthly basis for at least one year in advance and cover all seasonal fluctuations.
B)cover a longer planning horizon when a firm's pattern is highly variable.
C)show the amount and timing of cash receipts and cash disbursements on an annual basis.
D)show the amount and timing of cash receipts and cash disbursements on a quarterly basis.

Question 11

A cash budget:

A)is based on the cash method of accounting.
B)is a "cash map," showing the amount and the timing of cash flowing into and out of the business over a given period of time.
C)will never be completely accurate since it is based on forecasts.
D)All of the above

Question 12

Which of the following would be a potential source of information for preparing a sales forecast?

A)Past records
B)Trade associations and the Chamber of Commerce
C)Similar firms
D)All of the above

Question 13

The first step in managing cash more effectively is:

A)having an adequate cash reserve for emergency expenditures.
B)rapid payment of accounts payable.
C)speeding up payment of accounts receivable.
D)understanding the company's cash flow cycle.

Question 14

More companies fail for the lack of ________ than for the lack of ________.

A)cash; profit
B)profit; cash
C)net revenue; gross revenue
D)vision; profit

Question 15

When a firm sells goods or services on credit,the owner needs to remember that for cash budgeting purposes:

A)the sale may be immediately posted as if it has been collected.
B)the sale should be recorded in the month it was made.
C)she must account for a delay between the sale and the actual collection of the proceeds.
D)such a transaction counts as a cash disbursement.

Question 16

When estimating the firm's end-of-month cash balance,the owner should first:

A)determine the cash balance at the beginning of the month.
B)add up total cash receipts and subtract cash on hand.
C)review the accounts receivable.
D)make a daily list of cash disbursements.

Question 17

Which of the following statements concerning cash management is false?

A)Cash is the most important,yet least productive,asset a small business owns.
B)Young companies tend to be "cash sponges," soaking up every available dollar of cash.
C)Fast-growing businesses are least likely to experience shortages.
D)Cash management involves forecasting,collecting,disbursing,investing,and planning for a company's cash needs.

Question 18

________ is the most important,yet least productive,asset that a small business owns.

A)Profit
B)Cash
C)Inventory
D)Accounts receivable

Question 19

On March 10th,a business owner receives an invoice from a supplier for $416.27 with "net 30" credit terms marked on it.On April 7th,the owner writes the supplier a check for $416.27 and mails it.When would this cash disbursement show up on the company's cash budget?

A)March 10th
B)March 30th
C)April 7th
D)April 10th

Question 20

A cash budget reveals important clues about how well a company ________.

A)balances its accounts receivable and accounts payable
B)controls inventory
C)finances its growth
D)All of the above

Question 21

To encourage credit customers to pay invoices promptly,a business owner should:

A)ensure that all invoices are clear,accurate,and timely.
B)state clearly a description of the goods or services purchased and an account number.
C)include a telephone number and a contact person in case the customer has a question or a dispute.
D)All of the above

Question 22

The Fair Debt Collection Practices Act prohibits business owners from:

A)harassing people who are past due.
B)sending invoices the same day product is shipped.
C)hiring debt collection attorneys.
D)referring past due bills to collection agencies.

Question 23

Patel Industries recently filled an order from one of its customers,Oxmoor Gardens,a small garden supply store.Oxmoor's owner recently received an invoice from Patel for $1,278.64 with selling terms of "2/10,net 30." Therefore:

A)the selling terms indicate that Oxmoor must pay 2 percent of the invoice by the 10th day of the month with the balance due in 30 days.
B)the selling terms are offering Oxmoor a 2 percent discount if the bill is paid within 10 days; otherwise the full amount of the invoice is due in 30 days.
C)the selling terms indicate that the full amount of the invoice is due within 30 days and Oxmoor will be subject to a 2 percent finance charge for every 10 days that the bill is past due.
D)the selling terms indicate that Oxmoor has not yet qualified for a quantity discount and must pay the full amount of the invoice within 30 days.

Question 24

________ small businesses take the time to conduct a credit check.

A)All
B)Most
C)Few
D)None of the

Question 25

Efficient cash managers:

A)disregard trade discounts because of their hidden costs.
B)avoid the use of credit cards to stretch their firm's cash balances.
C)set up a payment calendar in order to both pay on time and take advantage of cash discounts for early payment.
D)use expressions like "the check is in the mail" to mollify creditors when short on cash.

Question 26

An effective approach to successful collections includes:

A)an abrupt,in-your-face style of communication once a payment is late.
B)waiting to invoice and communicate with the customer once a payment problem clearly exists.
C)setting up an automated collection system to generate "Past Due" notices that does not require personal intervention.
D)timely,well-communicated payment expectations with well-documented records.

Question 27

An entrepreneur can potentially improve collections by:

A)contacting the customer once the bill becomes past due to verify they have received the bill and that it is accurate
B)negotiate payment if the customer is unable to pay the full amount on time.
C)developing a rapport with the customer that will lead to prompt payment.
D)all the above

Question 28

The cost to check a potential customer's credit at a reporting service typically ranges from:

A)$1 to $5.
B)$15 to $85.
C)$100 to $150.
D)$500 to $750.

Question 29

Once a credit account becomes past due,a small business owner should:

A)wait patiently; the customer will most likely pay the bill eventually.
B)turn the account over to a collection agency the day it becomes past due.
C)send a "second notice" letter requesting immediate payment.
D)call the "deadbeat" in the middle of the night and make harassing and threatening remarks until he pays.

Question 30

Experts estimate that ________ percent of industrial and wholesale sales are on credit,while ________ percent of retail sales are on credit.

A)20; 40
B)40; 20
C)60; 30
D)90,40

Question 31

According to the American Collector's Association,only ________ of accounts more than 90 days delinquent will be paid voluntarily.

A)5 percent
B)20 percent
C)45 percent
D)65 percent

Question 32

By planning cash needs ahead of time,a small business is able to achieve all but which of the following?

A)Make the most efficient use of available cash.
B)Provide the opportunity to forgo quantity and cash discounts.
C)Finance seasonal business needs.
D)Provide funds for expansion.

Question 33

Small businesses selling on credit find that:

A)it is relatively inexpensive and it is simple.
B)it is expensive,requires a great deal of effort,and it is risky.
C)it is essentially borrowing money from the customer.
D)many can get by without selling on credit because their business customers do not expect to use credit.

Question 34

Once a small business has established a firm written credit policy and has clearly communicated it,the next step in building an effective credit policy is to:

A)send invoices promptly.
B)determine what percentage of sales are being written off as bad debt.
C)create a simple credit application.
D)create a "tracking file" of events.

Question 35

According to the American Collectors Association,if a business is writing off more than ________ of its sales as bad debts,it needs to tighten its credit and collection policies.

A)3 percent
B)5 percent
C)10 percent
D)25 percent

Question 36

The "big three" of cash management include:

A)accounts receivable,overhead,and inventory.
B)accounts payable,accounts receivable,and taxes.
C)accounts receivable,accounts payable,and inventory.
D)accounts receivable,prices,and expenses.

Question 37

One recent study showed that only about ________ of small businesses used formal techniques such as cash budgets to track their cash balances.

A)16 percent
B)26 percent
C)36 percent
D)46 percent

Question 38

An important source of credit information that collects information on small businesses that other reporting services ignore is:

A)National Association of Credit Management.
B)TRW.
C)Dun & Bradstreet.
D)National Association of Small Business Owners.

Question 39

A contract in which a business selling an asset on credit gets a security interest in that asset (the collateral),protecting its legal rights in case the buyer fails to pay is a:

A)lockbox.
B)classic collection blunder.
C)way to protect the buyer.
D)security agreement.

Question 40

A collection agency typically takes ________ percent of the amounts they collect on past due accounts.

A)5 to 10
B)10 to 20
C)25 to 50
D)75 to 90

Question 41

Leasing allows business owners to forecast cash flows more ________ because lease payments are ________ amounts paid over a particular time period.

A)often; fixed
B)accurately; variable
C)accurately; fixed
D)often; variable

Question 42

Which of the following is an effective way to trim overhead?

A)When able,buy instead of leasing.
B)Hire more full-time employees; reduce the number of part-timers.
C)Eliminate zero-based budgeting.
D)Negotiate fixed loan payments to coincide with company cash flow.

Question 43

Rather than build the current year budget on increases from the previous year's budget,________ evaluates the necessity of every item.

A)zero-based budgeting
B)zero-based accounting
C)ground-up budgeting
D)year-one budgeting

Question 44

When investing surplus cash,the small business owner's key objectives should be:

A)high yields.
B)current income.
C)liquidity and safety.
D)long-term yield.

Question 45

Which of the following statements concerning leasing is true?

A)Leasing is an "off-the-balance-sheet" method of financing assets.
B)Although total lease payments for an asset are greater than those on a conventional loan,most leases do not require large capital outlays as down payments.
C)Leasing gives business owners access to equipment even when they cannot borrow the money to buy it.
D)All of the above

Question 46

Which of the following is true about inventory management for the small business owner?

A)Most small business owners have turned to technology and computer spreadsheets to achieve maximum efficiency in managing it.
B)Inventory is the largest capital investment for most businesses but few owners use any formal means for managing it.
C)Inventory is generally highly liquid and can be easily mortgaged to a bank for immediate cash if needed.
D)Inventory yields a return of about 25 percent for manufacturing firms but nothing for service companies.

Question 47

Which of the following inventory management techniques would help a business owner make the best use of his company's cash?

A)Avoid overbuying inventory.
B)Schedule inventory deliveries at the latest possible date.
C)Purchase goods from the fastest suppliers who can meet quality standards to keep inventory levels low.
D)All of the above

Question 48

It is estimated that approximately ________ companies,most of them small,engage in barter exchanges every year.

A)50,000
B)100,000
C)200,000
D)500,000

Question 49

The objectives of cash management are to adequately meet the cash demands of the business,to avoid retaining unnecessarily large cash balances,and to stretch the profit-generating power of each dollar the business owns.

Question 50

For product-based businesses,________ often represents their largest capital investment.

A)account receivables
B)inventory
C)plant and equipment
D)real estate

Question 51

A common cause of business failures is that owners neglect to forecast how much cash their companies will need until they reach the point of generating positive cash flow.

Question 52

The real benefit of barter for the entrepreneur is that:

A)it is essentially without cost to the business owner.
B)it is considered a depreciable item for tax purposes rather than as income.
C)it saves the small business owner between $100,000 and $150,000 a year on the average.
D)it is "paid" for at the wholesale cost of doing business,yet it is credited at the retail price.

Question 53

"Stick to what you are good at and ________ everything else" is an approach to reduce overhead costs.

A)make
B)sell
C)leverage
D)out source

Question 54

Only about ________ percent of a typical business' inventory turns over quickly.

A)20
B)40
C)60
D)80

Question 55

It is likely that young companies and rapidly growing companies will experience cash flow difficulties.

Question 56

Cash is the most important,yet least productive,asset a small business owns.

Question 57

Exchanging goods and services for other goods and services,or ________,is an effective way for a small business to conserve cash.

A)leasing
B)bartering
C)arbitraging
D)credit sales

Question 58

A sweep account is a checking account that:

A)bears interest allowing depositors to write checks without tying up money for a specific period of time.
B)never has funds as they are drawn from a master account.
C)automatically moves all funds in a company's checking account above a predetermined minimum into an interest-bearing account.
D)need to be reviewed and updated on a regular basis.

Question 59

Barter offers business owners the benefit of:

A)buying materials,equipment,and supplies without spending valuable cash on them.
B)transforming slow-moving inventory into much-needed goods and services.
C)"paying" for goods and services at wholesale cost and getting credit for retail price.
D)All of the above

Question 60

A checking account that never has idle funds because it draws funds from an interest-bearing master account to cover checks written is called a:

A)zero-balance account.
B)money market account.
C)deficit account.
D)sweep account.

Question 61

A small business whose sales are highly variable,such as a seasonal business,should use a short cash planning horizon.

Question 62

In a cash budget,credit sales to customers are recorded at the time the sale is made.

Question 63

Compiling the total cash on hand,bank balance,summary of the day's sales,summary of the day's cash receipts,and a summary of accounts receivables collections into monthly summaries provides the basis for making reliable cash forecasts.

Question 64

The goal of cash management is to maintain as much cash as possible on hand to meet any unexpected circumstances that might arise.

Question 65

The most reliable method of determining an adequate minimum cash balance is using estimates of similar businesses from trade literature.

Question 66

The first step in preparing a cash budget is to forecast sales.

Question 67

Developing a cash forecast is essential for new businesses because early profit levels usually do not generate sufficient cash to keep the company afloat.

Question 68

A highly profitable company rarely experiences cash flow problems.

Question 69

A small company's ideal minimum cash balance is one month's sales.

Question 70

Because the heart of the cash budget is the sales forecast,the cash budget is only as accurate as the sales forecast on which it is based.

Question 71

A cash budget allows a small business owner to anticipate cash shortages and cash surpluses and gives him time to handle,or even avoid,approaching problems.

Question 72

Typically,small business owners should prepare a projected weekly cash budget for at least six months and quarterly estimates for the remainder of the year,being careful to cover all seasonal sales fluctuations.

Question 73

The shorter a company's cash flow cycle,the more likely it is to encounter a cash crisis.

Question 74

A highly profitable business is a highly liquid business.

Question 75

Profit is the difference between a company's total revenue and its total expenses.

Question 76

The cash budget is nothing more than a forecast of the firm's cash inflows and outflows for a specific time period,and it will never be completely accurate.

Question 77

Depreciation and debt expenses are often left off the cash budget but need to be included to accurately forecast cash requirements for running the business.

Question 78

A small firm's minimum cash balance should be two times its average weekly sales.

Question 79

A small company's cash balance is the difference between total revenue and total expenses.

Question 80

The primary problem with cash management tools is that they are too complex and time consuming for small business owners to use practically.