Cash Flow & Debt Management Flashcards

A client is 'cash flow positive' but consistently overdraws their checking account. What is the MOST likely cause?

Answer: Timing mismatch between income receipt and bill due dates

Even with positive net cash flow, overdrafts occur when bills are due before income arrives, a timing or liquidity problem.

In the context of RFC planning, 'discretionary cash flow' is BEST defined as:

Answer: Net income minus debt service and essential expenses

Discretionary cash flow is what remains after covering all necessary expenses and debt service, available for savings or spending.

Which debt repayment strategy results in the highest total interest paid over time?

Answer: Snowball method

The snowball method targets smallest balances first, ignoring interest rates, which often results in more total interest paid.

A client's free cash flow is defined as operating cash flow minus:

Answer: Capital expenditures

Free cash flow = operating cash flow minus capital expenditures, representing cash available after maintaining/growing assets.

Under RFC debt management principles, which action BEST improves a client's credit utilization ratio?

Answer: Paying down revolving balances below 30% of limits

Credit utilization = balances ÷ limits; keeping it below 30% positively impacts credit scores.

A client is considering a 15-year vs. 30-year mortgage on a $400,000 loan at the same rate. Which statement is MOST accurate?

Answer: The 15-year will have higher monthly payments but lower total interest

A 15-year mortgage has higher monthly payments but significantly less total interest paid due to the shorter amortization period.

Which of the following describes 'income smoothing' in personal cash flow planning?

Answer: Timing income recognition to match expense patterns across months

Income smoothing means aligning when income is received (or drawn) with when expenses occur to avoid cash flow gaps.