Chapter 14

What are the only 3 sources that cash can come from?

Be obtained by selling the product and services of the business and collecting cash from customers. (cash flow from operations), Can be obtained from investments the business has made, such as stocks, bonds, land, buildings, or equipment (cash flow from investing), OR Obtain cash through financing. Cash donated to the business in return for ownership or in the form of money borrowed from other entities.

2 primary causes of Float

Delays in transferring money among banks due to internal procedures (float availability) and Delays in delivering checks from the writer of the check to the recipient's bank (processing float)

Three primary causes of cash flow problems are what?

Difficulty collecting money due from customers, Seasonal variation in sales, and Unexpected decreases in sales.

What is money? Why is it so important?

Money in its different forms represents the lifeblood of the business, and knowing which form to use, and when to use it, can make the difference between boom and bankruptcy.

Many businesses experience difficulty or even failure because?

The mismatch in time between receiving cash and spending cash and the mismatch between the size of payments received and the size of payments that must be made

Timing Purchases

a method of controlling the timing of cash outflows that is invisible to suppliers and vendors.

Payables

amounts owed to vendors for merchandise or services purchased on credit. (something you may pay next month)

Reconciling

an accounting process that identifies the causes of all differences between book and bank balances. (to get a more realistic view of the cash balance)

Clearing House

an entity that processes checks and electronic fund transfers for banks and other financial organizations.

Cash Equivalents

assets that may be quickly converted to cash. Businesses use cash equivalents because they provide a better measure of the resources available to pay current bills than is provided by cash alone.

Factoring Receivables

borrowing money secured by a firm's accounts receivable. To factor your receivables, your customers must have good credit ratings.

Deposit and Progress Payments

cash payments received before product is completed or delivered (very commons with water parks & construction industry)

For many small businesses, the sales forecast is the?

cash receipts forecast

Float

delays in the movement of money among depositors and banks.

The vast majority of business theft is committed by employees how?

employees have access to cash in the course of doing their jobs and employees are often in a position to be able to hid the theft.

Growth Trap

financial crisis that is caused by a business growing faster than it can be financed. Growing will produce more money, but right now you need money to grow.

Cash Budget

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

Phony disbursements

making fake invoices paid by your case disbursement procedure.

What is critical to succeeding and being able to attain goals that are more important to you?

managing your business's money!

Demand Deposit

money held in checking and saving accounts.

Cash

money that Is immediately available to be spent >Composed of three forms of money: currency, demand deposits, and traveler's check

Commercial Paper

notes issued by credit-worthy corporations.

Trade discounts

percentage discounts from gross invoice amounts provided to encourage prompt payment (encourage customers to make timely payments on account)

Discounts for Prompt Payments

reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner

Noncore Projects

revenue-producing tasks and activities related to, but not part of, the primary strategy of a business

Currency

the bills and coins printed by governments to represent money

Bank Ledger Balance

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

there are several strategies that will provide saving in cash outflows which are?

trade discounts, non-cash employee incentives, use of temporary agencies, consignment, barter, control of timing paying out cash, and negotiation of terms with suppliers

The basis to being able to control your business's money is to what?

understand and be able to predict the patterns of cash flows

Short-Term Debt

any debt that must be paid in less than one year from the date of the financial statement on which it is reported.

Cash-to-cash 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.

The final step in the part of business planning is?

to put everything together to create a complete set of pro forma financial statements that you can use for raising money.

Gaming the Payment Process

using methods to appear to be paying bills on time, when in fact payment is being delayed or avoided

Skimming

"pocketing" money from customers and hiding the theft by not recording the sale (bartender who "forgets" to enter a sale, sales clerk scanning a $20 jacket instead of a $500 coat)

The business plan also assumes that all revenue will be collected in the month of the sale. It takes approximately three to five working days for credit card charges to be transferred into the merchant's bank account

TRUE

What are the eight strategies employed by small business for handling money shortages?

Use personal money, Borrow, Adjust scheduled purchases, Adjust scheduled payments, Try to collect money due, Sell investments, Sell receivables, and Lay off employees

Larceny and embezzlement

method used to steal cash after it has been received and recorded in the accounting books (a crooked accountant can steak the entire value of your business)

Together what three strategies were used by over 60% of the respondents to the survey?

personal money, borrow, and adjust scheduled purchases

Non-Cash Incentives

rewards that do not require payment of cash, such as stock options, compensating time off, or added vacation days.

Marketable Securities

stocks and bonds that are traded on an open market

Two factors of cash outflows that must be controlled are?

the amount of cash being paid out and the timing of cash being paid out

Information that the bank knows about your account that you do NOT know is?

the amount of service charges taken from your account, the amount of any direct payments made for your account by your customers, the amount of any interest received or charged, and the amount of checks that were returned because of non sufficient funds

What are the five proven techniques that increase the amount of cash flows while simultaneously reducing the effects of irregular or seasonal patterns of receipts?

taking deposits and progress payments, offering discounts for prompt payments, asking for your money, taking on noncore paying projects, and factoring receivables

Cash flow management is a problem for small businesses because of what?

the difficultly of matching the timing of the receipt of cash to the timing of the need to expend cash.

Cash Disbursements Budget

a schedule of the amounts and timings of payments of cash out of a business.

Cash Receipts Budget

a schedule of the amounts and timings of the receipt of cash into a business.

Bank Available Balance

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

The final step in preparing a master budget is what?

prepare a balance sheet for each accounting period

Money is a medium of exchange accepted by the community, meaning it's what people buy things with and sell for. Money is a store of value that can be saved for later purchases.

TRUE

Receivables

amounts that are owed to a business for merchandise that was sold on credit. (money you will collect in the future) you use the money to buy things necessary to run the business.

Comprehensive Budget

are often referred to as master budgets and usually stated with an accuracy no greater than whole dollar amounts.

Reconciling differences in the bank and book balances serves what four purposes?

gives you a way to estimate the bank's available balance for the purpose of managing your cash flows, Identifies any mistakes that were made by either the bank or by your own bookkeeper- and those mistakes happen, checks the accuracy of both the bank and business records, providing an accurate statement of the value of cash held by the business, and lets you know about items on the bank statement that would not otherwise be included in the business's accounting records

What are the 2 reasons bank balances differ from the book balances?

the banks know information about your account that you cannot know until the bank tells you OR you know information about your account that the bank cannot know, relevant transactions have not yet reached the bank

Consignment

the practice of accepting good for resale, without taking ownership of them and without being responsible to pay prior to their being sold (used in art galleries, specialty food items, used furniture, used cars)

Barter

the practice of trading goods without the use of money. Although Barter is legal in the United States and is a taxable transaction.

Company Book Balance

the sum of cash inflows (sales, receivables, deposits) and cash outflows (salaries, wages, tax) recorded in the firm's accounting records. (usually called the cash account). Book balance does not reflect the actual amount.