Chapter 3: Liquidity and Managing Cash Flow

Question 1

Liquid

accounting definition

Answer 1

Cash or access to cash to meet obligations

Question 2

Liquidity

Answer 2

Sum of cash and cash-equivalent, short-term investments, unused lines of credit, and committed loans from financing institutions

Question 3

What is an important financial strategy for nonprofits to ensure they have the finances on hand to operate?

Answer 3

Set a Target Liquidity, and strive to maintain it

Question 4

Cash-Flow Management

Answer 4

Process of projecting, monitoring, analyzing, and adjust cash inflows/outflows/balances

Question 5

Cash budget

Answer 5

predicts and estimates cash receipts and disbursements on a quarterly or monthly basis

Question 6

Cash-Flow Gaps

Answer 6

Periods when cash outflows exceed cash inflows. Gap can be closed with advance planning.

Question 7

What are some solutions to temporary cash-flow gaps?

Answer 7

Using reserve cash that you have a plan to replenish
Taking out a loan or line of credit
Ask revenue sources for advance donations/grants etc (speeding up collection)
Fundraising
Liquidating investments
Delaying payment to vendors

Question 8

What are safe and liquid ways to save cash?

Answer 8

1. Certificates of deposit
2. Money Market Funds
3. US Treasury securities

Question 9

Working Capital

Answer 9

Difference between current assets and current liabilities

Question 10

Two ways for nonprofits to put a surplus of cash to use

Answer 10

1. Short term investments

2. Taking advantage of trade credit terms

Question 11

Investment Returns

Answer 11

interest or yield that an investment generates (which is the purpose of making an investment)

Question 12

Criteria for short-term investments by a nonprofit (3)

Answer 12

1. Safety (top priority)
2. Liquidity
3. Returns (interest, etc)

Question 13

Annual interest rate formula

Answer 13

(d/(1-d) x (365/(t2 - t1))
* d = discount
t2 = credit period
t1 = discount period