Which action best supports maintaining solvency?

• A. No excess inventory
• B. Bank check quickly
• C. Short credit terms for sales
• D. Do cash flow forecasts

Answer: (D)

Planning cash flows is the best way to support solvency because solvency depends on having enough cash to meet debts as they fall due. A cash flow forecast looks ahead at when money will come in and when money must go out, so you can spot potential shortfalls before they happen.

With that forward view, you can take proactive steps to keep the business solvent: arrange short-term funding if needed, time payments to suppliers, speed up cash receipts from customers, adjust large expenditures, and manage inventory to avoid tying up too much cash. This forward planning reduces the risk of running out of cash and helps maintain the ability to pay debts over the longer term.

Other options don’t address the timing of cash needs as directly. Keeping inventory at a minimal level helps reduce carrying costs, but it doesn’t guarantee enough cash to meet obligations. Quickly checking the bank balance is a reactive measure, not a plan to prevent shortfalls. Short credit terms for sales might improve cash received sooner in some situations, but they can also reduce sales or strain customer relationships and don’t provide a comprehensive view of future cash needs.