Managing Receivables and Payables to Improve Cash Flow Activities

What are payables?

payables are a form of financing

What does a cash budget do?

plan cash flow, predict income, assess expenses, know when to borrow

What are the risks of extending credit?

-customer doesn't pay - the "cost" of managing & controlling receivables

The average collection period is:

50 days

What are examples of short-term financing?

bank loan, line of credit, and commercial paper

If your business is currently experiencing cash flow issues, which of the following actions would you avoid? a. reducing collection times for receivables b. reducing operating expenses c. increasing inventory d. delaying current accounts payable

c. increasing inventory

What does 2% 10 net 30 a calculation of?

it is a calculation of Effective Annual Rate (EAR)

What is receivables management?

managing the money that's owed to your company

Do you have to provide credit at your business?

-many businesses are cash only - B2B transactions typically involve credit

Which type of short-term financing is given only to credit-worthy companies? a. commercial papers b. lines of credit c. stock issues d. bank loans

a. commercial papers

Where in the operating cycle is a business most concerned about managing the cash from customers? a. sales b. receivables c. inventories d. purchases

b. receivables

When is a good time to be calculating solvency ratios?

when extending credit on financial statements, is it a good time to calculate solvency ratios

What are some factoring concerns?

-expensive source of financing - customer perception

Who do I extend credit to?

- financial statements -history with other suppliers -credit scoring agencies (Equifax, Dun, & Bradstreet)

Which short-term financing vehicle is considered an "IOU"? a. line of credit b. bank loan c. commercial paper d. bonds

c. commercial paper

What are the main components of the business operating cycle?

- using cash to buy or manufacture - selling the product or service - getting paid (converting to cash, hopefully with a profit)

What are the expenses that require payment in cash?

bills, payroll, rent, insurance

Selling on credit is likely to result in increased sales, however there are additional risks associated with credit. What is an example of a credit risk? a. debts will go unpaid b. money gets tied into Accounts Receivable c. additional bookkeeping costs d. all of these answers

d. all of these answers

What is the operating cycle?

the time from a purchase of materials to collection of cash

What do payment terms for payables usually include?

they usually include a discount for early payments

What are credit risks?

unpaid debt, added bookkeeping costs, limited use of money

What do we do about overdue accounts?

- send reminder statements - call them to discuss the problem - collection agency ( do i want to keep this customer?)

In the context of internal controls, which example demonstrates "separation of duties"? a. A warehouse manager is not provided access to the company's inventory records. b. A manager at a high-tech company is prohibited from taking a company laptop on trips. c. Warehouse employees are required to take two-week vacations every year. d. The purchasing manager's computer is password protected.

a. A warehouse manager is not provided access to the company's inventory records.

ABC Corp. purchases electronic components to assemble cell phones. Where should ABC engage in short-term financial management? a. in the lag time between making cash payments to vendors for inventory and receiving cash payments from customers b. in ABC's operating cycle if it is buying inventory on credit and offering credit terms to its customers c. in ABC's operating cycle if assembling the cell phones takes longer than the amount of time it planned for d. in the lag time between making cash payments to vendors and completing the assembly of cell phones

a. in the lag time between making cash payments to vendors for inventory and receiving cash payments from customers

You have purchased inventory from a supplier on credit. Their terms are 2% 10 net 30. If you wanted to delay your accounts payable payments, which terms below would be the best to negotiate with your supplier? a. 2% 10 net 40 b. 3% 10 net 20 c. 2% 10 net 45 d. 3% 10 net 30

c. 2% 10 net 45

What does the Sarbanes Oxley Act of 2002 say?

companies must have internal controls in place and verified by auditor (they must have a paper or digital trail)

How does a company use a "cash budget" for short-term financing needs? a. A cash budget provides a company with the amount of cash it has on hand at any given time. b. A cash budget can determine the yield on the cash it has on hand. c. A cash budget predicts a need for cash sometime in the future. d. A cash budget can be used to approach a bank or other lender for a short-term loan.

d. A cash budget can be used to approach a bank or other lender for a short-term loan.

FunTime rents out inflatable rides for home holiday parties. Why should FunTime have a cash budget? a. to spread out its accounts payable based on when it receives cash from customers b. to purchase inventory for a full year and not when the inventory will be needed c. so it knows what its expenses will be depending on the type of holiday party d. to prepare for fluctuations in months that do not have holidays

d. to prepare for fluctuations in months that do not have holidays

Why would a company use a restrictive laptop policy? a. to protect independent checks b. to protective the laptop as a physical asset c. to separate duties d. to protect intellectual property

d. to protect intellectual property

How can you shorten the operating cycle without adversely affecting anything else? a. Reduce your amount of inventory. b. Buy inventory in larger quantities. c. Increase the amount of sales. d. Work with a good vendor partner.

d. work with a good vendor partner

What are two examples of internal control practices?

separation of duties, physical asset protection, and independent checks, employee vacations

What are internal controls?

systems that ensure a company meets its obligations and that financial reports are accurate