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Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 13 Managing Cash Flow
1) 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
2) ________ is the most important, yet least productive, asset that a small business owns.
A) Profit
B) Cash
C) Inventory
D) Accounts receivable
3) 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.
4) 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
5) Cash is the most important, yet least productive, asset a small business owns.
6) 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.
7) 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.
8) The goal of cash management is to maintain as much cash as possible on hand to meet any
unexpected circumstances that might arise.
9) It is likely that young companies and rapidly growing companies will experience cash flow
difficulties.
10) The shorter a company's cash flow cycle, the more likely it is to encounter a cash crisis.
11) Why is cash a unique asset? What are the advantages of efficient cash management?
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
13) 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
14) ________ typically lead(s) sales; ________ typically lag(s) sales.
A) Production; receivables
B) Collections; purchases
C) Receipts; production
D) Purchases; collections
15) A highly profitable company rarely experiences cash flow problems.
16) Developing a cash forecast is essential for new businesses because early profit levels usually
do not generate sufficient cash to keep the company afloat.
17) A highly profitable business is a highly liquid business.
18) Profit is the difference between a company's total revenue and its total expenses.
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.
20) A small company's cash balance is the difference between total revenue and total expenses.
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."
22) 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?
23) 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
24) 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
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
26) 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
27) 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
28) 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
29) 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
30) A cash budget is only as accurate as the ________ forecast from which it is derived.
A) profit
B) receivables
C) income
D) sales
31) 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
32) 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
33) 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
34) 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
35) 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
36) 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
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.
37) 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
38) 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
39) 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.
40) 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.
41) A small business whose sales are highly variable, such as a seasonal business, should use a
short cash planning horizon.
42) The primary problem with cash management tools is that they are too complex and time-
consuming for small business owners to use practically.
43) In a cash budget, credit sales to customers are recorded at the time the sale is made.
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.
45) 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.
46) The first step in preparing a cash budget is to forecast sales.
47) The most reliable method of determining an adequate minimum cash balance is using
estimates of similar businesses from trade literature.
48) A small firm's minimum cash balance should be two times its average weekly sales.
49) A small company's ideal minimum cash balance is one month's sales.
50) 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.
51) Since even the best sales forecast will be wrong, the small business owner should prepare
three forecasts – optimistic, pessimistic, and most likely.
52) A sale to a customer is not really a sale until the business owner actually collects the money
from it.
53) To project cash receipts, an entrepreneur must analyze accounts receivable to determine the
company's collection pattern.
54) 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.
55) 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.
56) What are the basic steps in preparing a cash budget? Which forecast is the "heart" of the cash
budget?
57) How are sales forecasts developed for an established business? How are sales forecasts
developed for a new business enterprise?
58) 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.
59) 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
60) 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
61) 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
62) The cost to check a potential customer's credit at a reporting service starts at $________.
A) 5
B) 40
C) 119
D) 499
63) ________ small businesses take the time to conduct a credit check.
A) All
B) Most
C) Few
D) None of the above
64) 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
65) 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
66) 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
67) 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
68) 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
69) 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
70) 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
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
72) 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
73) 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
74) 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
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
76) 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
77) For product-based businesses, ________ often represents their largest capital investment.
A) account receivables
B) inventory
C) plant and equipment
D) real estate
78) 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.
79) Only about ________ percent of a typical business' inventory turns over quickly.
A) 20
B) 40
C) 60
D) 80
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.
80) 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
