Finance Study Guide Module 6

What is the second source of cash flow?

Cash flow from investing: sell off long term investments; cash can be obtained from investments that business has made such as stocks, bonds, buildings, land, etc.

What is the first source of cash flow?

Cash flow from operations: selling products or services and collecting cash from customers

What is the third source of cash flow?

The business itself may obtain cash through financing (debt or equity financing)

Growth Trap

a financial crisis that is caused by a business growing faster than it can be financed; where you take on more than you can finance

Timing Purchases

a method of controlling the timing of cash outflows that is invisible to suppliers and vendors; way to decrease cash flows; take advantage of sales (on items for example)

Discounts for Prompt Payment

a reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner; a tool for increasing cash flows

Cash Disbursements

a schedule of the amounts and timings of payments of cash out of a business; second part of cash budgets; what's going out

Cash Receipts

a schedule of the amounts and timings of the receipt of cash into a business; first part of cash budgets; what's coming in

Payables

amounts owed to vendors for merchandise or services purchased on credit

Receivables

amounts that are owed to a business for merchandise that was sold on credit

Reconciling

an accounting process that identifies the causes of all differences between book and bank balances

Cash Equivalents

assets that may be quickly converted to cash; short-term investments

Factoring Receivables

borrowing money secured by a firm's accounts receivable; tool for increasing cash flow; where you sell your accounts receivables to third party providers who pay you money for them even though they aren't fulfilled yet; is a last resort because you lose a fair amount of money

Deposits and Progress Payments

cash payments received before products is completed or delivered; works to increase cash flow to fund expenses for making product

Cash Projection

combines receipts and disbursements to give an overall picture of the cash needs for the period funds; third part of cash budget; tells if you have a surplus or deficit

What are the 3 primary causes of cash flow problems?

difficulty collecting money due from customers; seasonal variation in sales; unexpected decreases in sales

Cash Budget

identifies when, how, and why cash is expected to come into the business, and when, how, and why cash is expected to leave the business

Cash

money that is immediately available to be spent

Trade Discounts

percentage discounts from gross invoice amounts provided to encourage prompt payment; works to decrease cash flow

Noncore Projects

revenue-producing tasks and activities related to, but not part of, the primary strategy of the business; works to increase cash flows and get business through the slow times (ex: seasonal lawn care business does snow plowing in winter)

Noncash incentives

rewards that do not require payment of cash, such as stock options, compensating time off, or additional vacation days; way to decrease cash flows

Bank Ledger Balance

the sum of deposits and withdrawals recorded in a bank's accounting records

Bank Available Balance

the sum of money that has actually been received and paid out of a depositor's account

Cash-to-cash cycle (Operating Cycle)

the time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale

What are the 10 strategies for handling cash shortages?

use the business line of credit (short-term loan); use personal money; borrow money; adjust scheduled purchases; adjust scheduled payments; try to collect money due' sell investments; sell receivables; lay off employees (absolute last resort!); sell off non-essential assets