Deck 13: Managing Cash Flow

Question 1

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

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

Answer 1

B

Question 2

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

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

Answer 2

D

Question 3

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

Answer 3

False

Question 4

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 5

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 6

A highly profitable business is a highly liquid business.

Question 7

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

Question 8

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 9

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

Question 10

A highly profitable company rarely experiences cash flow problems.

Question 11

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 12

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 13

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

Question 14

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 15

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

Question 16

Why is cash a unique asset? What are the advantages of efficient cash management?

Question 17

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 18

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

Question 19

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 20

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

Question 21

Your friend Jake owns a business that is achieving phenomenal growth. Explain why it is said that: "Fast-growing companies are most likely to experience cash shortages."

Question 22

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

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

Question 23

Mini-Case 13-3: Rent-A-Nerd Computer Consultants
The owners of Rent-A-Nerd Computer Consultants have prepared the partial cash budget for the upcoming quarter:
CASH BUDGET - RENT-A-NERD COMPUTER CONSULTANTS
Month 1 Month 2 Month 3
Cash Receipts
Total Sales $42,650 $45,500 $47,000
Credit Sales 25,590 27,300 28,200
Collections
10 percent same month 2,559 2,730 2,820
80 percent next month 19,941 20,472 21,840
8 percent following month 1,864 1,994 2,048
Cash Sales $17,060 $18,200 $18,800
Total Cash Receipts ________ ________ ________
Cash Disbursements
Purchases $32,404 $33,267 $35,490
Wages/Salaries 4,212 4,897 5,126
Rent/Utilities 1,865 1,910 2,250
Other 2,400 3,750 6,105
Total Cash Disbursements ________ ________ ________
End of Month Balance
Beginning Cash $4,750 ________ ________
Cash Receipts ________ ________ ________
Cash Disbursement ________ ________ ________
EOM Balance ________ ________ ________
Borrow ________ ________ ________
Repay ________ ________ ________
Calculate the final end-of-month balance for months 1-3 and answer the following questions.
Total cash receipts for months 1, 2, and 3, respectively are ________.

A)$42,650, $45,400, and $47,000
B)$25,590, $27,300, and $28,200
C)$68,240, $72,800, and $75,200
D)$41,424, $43,396, and $45,508

Question 24

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

Question 25

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 26

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

Question 27

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 28

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 29

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 30

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 31

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)(s)he 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 32

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 33

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 34

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 35

A cash budget is based on the cash method of accounting, meaning that cash receipts and cash disbursements are recorded in the forecast only when ________ is expected to take place.

A)the transaction is predicted
B)a credit sale
C)the cash transaction
D)projections are

Question 36

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

Question 37

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 38

The profits your small business is generating are high; however, you never seem to have enough cash to pay your bills on time. Are cash and profit the same thing? Why or why not?

Question 39

The end-of-the-month balances for months 1, 2, and 3, respectively are ________.

A)$5,293, $4,865, and $1,402
B)$6,519, $8,195, and $6,224
C)-$10,541, -$12,524, and -$16,771
D)$32,109, $61,085, and $87,314

Question 40

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

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

Question 41

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

Question 42

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 43

How are sales forecasts developed for an established business? How are sales forecasts developed for a new business enterprise?

Question 44

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 45

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

Question 46

A sale to a customer is not really a sale until the business owner actually collects the money from it.

Question 47

What are the basic steps in preparing a cash budget? Which forecast is the "heart" of the cash budget?

Question 48

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 49

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

Question 50

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

Question 51

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

Question 52

Since even the best sales forecast will be wrong, the small business owner should prepare three forecasts - optimistic, pessimistic, and most likely.

Question 53

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 54

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 55

To project cash receipts, an entrepreneur must analyze accounts receivable to determine the company's collection pattern.

Question 56

The key factor in forecasting cash disbursements for a cash budget is to record them in the month when they are incurred, not when they are paid.

Question 57

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 58

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

Question 59

Some financial analysts recommend that new owners estimate cash disbursements as best they can and then add another 25 to 50 percent of the total.

Question 60

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

Question 61

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 30
D)30 to 50

Question 62

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 63

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 64

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 65

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 66

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

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

Question 67

Mini-Case 13-3: Rent-A-Nerd Computer Consultants
The owners of Rent-A-Nerd Computer Consultants have prepared the partial cash budget for the upcoming quarter:
CASH BUDGET - RENT-A-NERD COMPUTER CONSULTANTS
Month 1 Month 2 Month 3
Cash Receipts
Total Sales $42,650 $45,500 $47,000
Credit Sales 25,590 27,300 28,200
Collections
10 percent same month 2,559 2,730 2,820
80 percent next month 19,941 20,472 21,840
8 percent following month 1,864 1,994 2,048
Cash Sales $17,060 $18,200 $18,800
Total Cash Receipts ________ ________ ________
Cash Disbursements
Purchases $32,404 $33,267 $35,490
Wages/Salaries 4,212 4,897 5,126
Rent/Utilities 1,865 1,910 2,250
Other 2,400 3,750 6,105
Total Cash Disbursements ________ ________ ________
End of Month Balance
Beginning Cash $4,750 ________ ________
Cash Receipts ________ ________ ________
Cash Disbursement ________ ________ ________
EOM Balance ________ ________ ________
Borrow ________ ________ ________
Repay ________ ________ ________
Calculate the final end-of-month balance for months 1-3 and answer the following questions.
How much would Rent-A-Nerd have to borrow if its desired minimum cash balance is $4,000?

A)$2,224 in Month 3
B)Nothing. Rent-A-Nerd's end of the month cash balance is below $4,000.
C)$2,598 in Month 3
D)$20,771 in Month 3

Question 68

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 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 69

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

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

Question 70

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

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

Question 71

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 72

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 73

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

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

Question 74

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 75

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 76

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

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

Question 77

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 78

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 79

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 80

The cost to check a potential customer's credit at a reporting service starts at $________.

A)5
B)40
C)119
D)499