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Unformatted text preview: Chapter 14 - Cash: Lifeblood of the Business CHAPTER 14: CASH: LIFEBLOOD OF THE BUSINESS Chapter Summary A continuation of Chapter 13, this chapter focuses on cash and cash flow problems and their solutions. Cash flow terminology is explored and students learn to reconcile company and bank balances. The budgeting process is completed with the cash budget. Learning Objectives After studying this chapter, the student should be able to: 1. Know the importance of managing your business' money. 2. Understand the concepts of money, cash, and cash equivalents. 3. Understand the basics of managing cash flow. 4. Be able to reconcile bank and company book balances. 5. Be prepared to develop a cash budget. 6. Have strategies for preventing and coping with cash flow problems. 7. Learn strategies for coping with cash shortages. Focus on Small Business: Stephen Lizio, Al Lovata, and Simone Williamson of Be Our Guest, Inc. Be Our Guest, Inc. is a small business that exhibits quite a bit of seasonality, seasonality that exacerbates the cash flow problems small business often have. The case shows how they explored several options, scraped by the first year, and then took steps to alleviate the problem the following years. Focus on Small Business: Discussion Questions 1. Why did the current amount of debt limit how much the business could borrow to solve the current cash crunch? a. Lenders assess the ability of borrowers to repay partly on the basis of total debt. The more that you owe to others, the more difficult it is to borrow additional amounts. b. Other factors that lenders consider include total amount of assets, the ratio of debt to assets, and operating income before income taxes. 2. Why does the fact that some customers are late paying in January make using the receivables for collateral so expensive? Factors charge higher fees and interest rates as the risk of non-collection of debt increases. The more customers who are late paying, and the more they are past due, the greater the fees that a lender will charge. 14-1 Chapter 14 - Cash: Lifeblood of the Business 3. Should the owners have reduced payments to themselves to be able to pay more to vendors and suppliers? This is really not a normative issue. There is no right or wrong. Owners may do what they wish. However, they might well have eased their cash problems, and increased their credit worthiness had they been willing to forego taking cash out of the business until the problem was solved. 4. How is it that a business could ...have enough money, but still not be able to pay its bills? a. Money is more than just available cash. Money can be represented by other assets, in this case by receivables. One constant cash flow problem that many small businesses face is the timing of the receipt of money, not the amount of money to be received....
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This note was uploaded on 11/21/2009 for the course MNGT 422X taught by Professor Godsey during the Spring '09 term at UNL.
- Spring '09