61) A ________ is a checking account that technically never has funds in it but is tied to another
master account like payroll.
A) cash account
B) money market account
C) zero balance account
D) sweep account
62) Sweep account refers to:
A) an account that sweeps cash from checking to personal savings.
B) an account that sweeps zero balance account to an interest bearing account.
C) an account that allows the small business owner to sweep funds between personal and
business accounts.
D) All of the above
63) ________ refers to buying much needed materials, equipment, and supplies—without using
cash.
A) Sweeping
B) Bartering
C) Purchase on an account
D) Net terms
64) One important characteristic of bartering is that:
A) the value of the products must be identical and the difference can be paid in cash.
B) the value of exchange of products or services could vary.
C) the exchange is in cash only.
D) no cash is being exchanged when bartering.
65) Ways to cut overhead cost are:
A) when possible buy instead of lease.
B) avoid non-essential outlays.
C) hire consultants and full time employees.
D) None of the above
66) The lack of cash has driven a number of small businesses, even those with solid profits, into
bankruptcy.
67) It is possible for a business to make a profit and go out of business due to cash flow
problems.
68) The objectives of cash management are to adequately meet the cash demands of the business
and to avoid retaining unnecessarily large cash balances.
69) The cash management role of “cash conserver,” controlling the cash needed to pay bills, and
prioritizing and timing those payments, is the entrepreneur’s first and foremost responsibility.
70) The cash flow cycle is the time lag between paying suppliers and receiving payment from
customers.
71) The longer a company’s cash flow cycle, the more likely it is to encounter a cash crisis.
72) For a small business, cash planning is relatively simple since cash and profits are the same.
73) Profit is the difference between a company’s total revenue and its total expenses.
74) Cash is money that flows through the business and is not tied up in any asset.
75) A firm whose sales volume is expanding rapidly need not be concerned about managing its
cash flow.
76) A cash budget is based on the accrual method of accounting.
77) A cash budget is the document that shows a company the margin between its profit and its
costs of goods and how to manage it.
78) Typically, a small firm should prepare a monthly cash budget for at least one year into the
future.
79) The cash budget is based on the residual method of accounting.
80) A cash budget is a forecast of the firm’s cash inflows and outflows over a specific time
period.
81) The first step in preparing a cash budget is to forecast cash receipts.
82) Ideally, a small firm’s cash balance should be two times its average weekly sales.
83) Some experts suggest that a small business should maintain a supply of cash on hand equal
to one-fourth its current debts.
84) One of the most reliable methods of determining an adequate minimum cash balance is using
past experience.
85) Since even the best sales forecast can be wrong, the small business owner should prepare
three forecasts—optimistic, pessimistic, and most likely.
86) In a cash budget, credit sales to customers are recorded as soon as the sale is made.
87) 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.
88) For cash planning purposes, it is better to underestimate cash disbursements than to
overestimate them.
89) To avoid cash crises, many owners add a “cushion” to each cash disbursement account since
many expenses run higher than expected.
90) To estimate a firm’s cash balance for each month, the owner must first wait until the end of
the month.
91) If a small firm’s profits are climbing, the owner can be sure its cash balance also is rising.
92) According to the National Association of Credit Management, receivables are only the
second most important item on the balance sheet.
93) The first line of defense against bad debt losses is to have a financial institution extend loans
to credit-seeking customers.
94) Most small businesses conduct a thorough credit investigation before selling to a new
customer.
95) An important first step in protecting the small business from bad debt losses is a detailed
credit application.
96) One effective technique for improving cash management is to establish a firm credit policy
in writing and let customers know in advance what it is.
97) When an account becomes overdue, entrepreneurs must take immediate action.
98) Small business owners should not press customers for payment of their past due accounts for
fear of losing them as customers altogether.
99) The longer a debt is outstanding, the lower its probability of collection.
100) When it comes to debt collection, it is appropriate to seek to motivate the customer to pay
and not get into why the bill hasn’t been paid during the “discussion stage” of the collection
process.
101) A lockbox arrangement is very inexpensive to operate and is economical even for small
businesses with a low volume of payments on account.
102) Some companies manage their accounts receivable and cash by using sweep accounts.
These are accounts where all funds above a certain minimum are automatically moved into an
interest-bearing account.
103) The wise small business owner should strive to stretch out his/her payables as long as
possible without damaging the company’s credit rating.
104) An invoice marked 3/12 net 30 means that you can take a 3% discount if you pay the bill in
12 days but you must pay the entire balance in 30 days.
105) Usually, trade credit from vendors is expensive, and small business owners should avoid it.
106) The danger inventory poses to a small business is the amount of cash it ties up.
107) Because inventory is illiquid, cash invested there is tied up and cannot be used for other
purposes.
108) Carrying too much inventory decreases the chances that a business will run out of cash.
109) One highly effective cash management strategy is to schedule inventory deliveries as early
as possible to speed your payment of accounts payable.
110) The nice thing about barter is that there is almost no cost involved in the process.
111) Nearly 80% of companies in the United States use leases to help cash management.
112) A lease is treated as an operating expense and is not carried as a liability on a company’s
balance sheet.
113) Rather than build the current year’s budget on increases from the previous year’s budget,
zero-based budgeting starts from a budget of zero and evaluates the necessity of every item.
114) Small business managers need not be concerned about investing surplus cash since small
amounts of cash sitting around for a few days or weeks are not worth investing.
115) When investing surplus cash, the small business owner should seek the highest returns
possible on the money.
116) A sweep account automatically “sweeps” all funds in a company’s checking accounts above
a predetermined minimum into an interest-bearing account.
117) Proper management of cash accounts can yield the owner additional leverage, the
equivalent to actually keeping the capital in the accounts.
118) Hiring both part-time and freelancers rather than full-time workers saves on both the cost of
salaries and employee benefits.
119) At the end of a capital lease, a business has no option left to purchase the equipment.
120) Lease is considered a liability on the balance sheet.
121) Only 60% of a typical business’ inventory turns over quickly.
122) Selling on credit is a common practice in business.
123) Cash flow cycle refers to the time lag between paying suppliers for merchandise and
receiving payment from customers.
124) Cash flow measures a company’s liquidity and its ability to pay its bills and other financial
obligations on time by tracking the flow of cash into and out of the business over a period of
time.
125) Cash budget is the same as “cash map.”
126) There are four steps to creating a cash budget: Determining an adequate minimum cash
balance; Forecasting sales; Forecasting cash receipts; and Estimating the end-of-month cash
balance.
127) Carrying too much inventory increases the chances that a business will run out of cash.
128) One disadvantage of carrying too much inventory is controlling and managing the
inventory.
129) Bartering refers to buying much needed materials, equipment, and supplies in exchange of
other products or services and cash.
130) What are the five cash management roles an entrepreneur needs to fulfill in his/her small
business?
131) Define or describe the terms: revenue, cash, profit, cash budget, cash flow, and cash flow
cycle. Why is it important to understand the differences among them?
132) Discuss the five basic steps to establishing a cash budget for a business.
133) What are the big three of cash management? How does each impact the operation of the
small business?
134) Create a credit and collection policy for a privately owned small bookstore/café which has a
number of customers who buy pastries on account and numerous customers with standing book
orders that they pay on once a month.
135) If you were having difficulty getting your customers to pay in a timely manner, what could
you do to speed payment?
136) How should a small business owner manage his/her accounts payable?
137) How can an entrepreneur manage inventory in order to improve cash flow?
138) What role does barter play in improving a small firm’s cash flow?
139) Offer several suggestions on how to trim overhead expenses in order to avoid a cash
crunch. Explain how each technique can reduce the cash requirements for a small business.