Association of Corporate Treasurers (ACT) Qualifications Cash and Liquidity Management Syllabus

Cash and Liquidity Management syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Cash and Liquidity Management in Association of Corporate Treasurers (ACT) Qualifications, not a summary of it.

1. 1

   Cash Management Fundamentals

   4 topics

   • The cash conversion cycle
     • Days sales outstanding, days payables and inventory days
     • Working capital impact on cash flow
   • Cash flow forecasting
     • Short, medium and long-term forecasting horizons
     • Receipts and disbursements vs. statistical methods
     • Forecast accuracy measurement and variance analysis
   • Payment and collection methods
     • Domestic and cross-border payment instruments
     • Real-time, ACH and high-value payment systems
   • Banking relationships and account structures
     • Relationship banking and wallet allocation
     • Account opening, KYC and mandate management
2. 2

   Liquidity Optimisation Techniques

   4 topics

   • Cash pooling structures
     • Notional pooling mechanics and benefits
     • Physical/zero-balancing concentration
     • Cross-currency and cross-border pooling considerations
   • Intercompany lending and netting
     • Bilateral and multilateral netting
     • Intercompany loan documentation and transfer pricing
   • Liquidity buffers and contingency
     • Minimum liquidity and headroom policy
     • Committed vs. uncommitted facilities as liquidity backstop
   • Trapped cash and repatriation
     • Exchange controls and regulatory restrictions
     • Dividend, royalty and management fee routes
3. 3

   Short-Term Investment and Borrowing

   4 topics

   • Money market instruments
     • Treasury bills, commercial paper and certificates of deposit
     • Repurchase agreements and money market funds
   • Investment policy for surplus cash
     • Security, liquidity and yield priorities (SLY)
     • Counterparty and concentration limits
   • Short-term borrowing instruments
     • Overdrafts, revolving facilities and bank lines
     • Commercial paper programmes
   • Yield calculation and money market conventions
     • Day-count conventions and discount vs. yield basis
     • Money market equivalent yields
4. 4

   Working Capital Management

   4 topics

   • Receivables management
     • Credit terms, credit control and collections
     • Factoring and invoice discounting
   • Payables management
     • Payment terms optimisation and dynamic discounting
     • Supply chain finance programmes
   • Inventory and cash trade-offs
   • Working capital metrics and benchmarking

Cash and Liquidity Management flashcards for Association of Corporate Treasurers (ACT) Qualifications

21 of 64 cards from the Cash and Liquidity Management deck — real questions with worked answers.

1. What is the cash conversion cycle (CCC) and what does it measure?

   The cash conversion cycle measures the time (in days) between paying cash for inputs and receiving cash from sales. It is the net number of days that cash is tied up in working capital operations. A shorter CCC means cash returns to the business faster.

2. State the formula for the cash conversion cycle (CCC).

   $$CCC = DIO + DSO - DPO$$ where DIO = Days Inventory Outstanding, DSO = Days Sales Outstanding (receivables days), and DPO = Days Payables Outstanding.

3. How is Days Inventory Outstanding (DIO) calculated?

   $$DIO = \frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \times 365$$ It represents the average number of days inventory is held before sale.

4. How is Days Sales Outstanding (DSO) calculated?

   $$DSO = \frac{\text{Average Receivables}}{\text{Credit Sales}} \times 365$$ It is the average number of days taken to collect cash from customers.

5. How is Days Payables Outstanding (DPO) calculated?

   $$DPO = \frac{\text{Average Payables}}{\text{Cost of Goods Sold (or Purchases)}} \times 365$$ It is the average number of days taken to pay suppliers.

6. What is the difference between the operating cycle and the cash conversion cycle?

   The operating cycle is $DIO + DSO$ (time from buying inventory to collecting cash). The cash conversion cycle subtracts DPO: $CCC = DIO + DSO - DPO$, recognising that supplier credit funds part of the operating cycle, so cash is only tied up for the net period.

7. Why might a company have a negative cash conversion cycle, and what is its advantage?

   A negative CCC occurs when $DPO > DIO + DSO$, i.e. the firm collects from customers (and turns inventory) before it pays suppliers. Common in retail/subscription models, it means suppliers effectively finance operations, generating a working-capital cash surplus that can fund growth.

8. What are the three main purposes of cash flow forecasting in treasury?

   1) Liquidity management — ensuring sufficient cash to meet obligations; 2) Investment/borrowing decisions — identifying surpluses to invest or deficits to fund; 3) Risk management — anticipating FX, interest rate and covenant exposures. It also supports planning and control.

9. Distinguish the receipts-and-payments method from the adjusted-net-income (indirect) method of cash flow forecasting.

   The receipts-and-payments (direct) method lists actual expected cash inflows and outflows by line item; it is accurate for short-term, detailed forecasts. The adjusted-net-income (indirect) method starts from projected profit and adjusts for non-cash items and working-capital changes; it suits longer-term, less granular forecasts.

10. Compare short-term and long-term cash flow forecast horizons and their typical uses.

    Short-term forecasts (daily/weekly, up to ~3 months) use the direct method for liquidity and funding decisions. Medium-term (monthly, up to ~1 year) support budgeting and facility planning. Long-term (annual, multi-year) use the indirect method for strategic capital and financing decisions.

11. What is a rolling cash flow forecast?

    A rolling forecast continuously extends the forecast horizon as each period passes (e.g. always projecting the next 13 weeks), dropping the elapsed period and adding a new one. It keeps the forecast current and improves accuracy through ongoing variance feedback.

12. What does forecast variance analysis involve and why is it important?

    Variance analysis compares forecast cash flows to actual outcomes, identifying and explaining differences. It is important because it measures forecast reliability, exposes systematic bias, improves future assumptions, and builds confidence for funding and investment decisions.

13. Compare cheques, BACS, Faster Payments and CHAPS as UK payment methods.

    Cheques: paper-based, slow clearing (~2 days). BACS: bulk electronic, 3-day cycle, low cost, used for payroll/direct debits. Faster Payments: near-instant, limit-capped, low value. CHAPS: same-day, real-time gross settlement, high value, higher cost, used for time-critical large payments.

14. What is a direct debit and what is a standing order?

    A direct debit is an instruction allowing a payee to collect variable amounts from a payer's account on agreed dates (controlled by the payee, protected by the Direct Debit Guarantee). A standing order is a payer-controlled instruction to pay a fixed amount to a fixed payee on regular dates.

15. What is the SWIFT network and what role does it play in payments?

    SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging network banks use to exchange standardised payment and financial instructions internationally. It transmits messages (e.g. MT103 for customer credit transfers) but does not itself move funds or hold accounts.

16. What is the difference between a real-time gross settlement (RTGS) system and a net settlement system?

    RTGS settles each payment individually and immediately in central bank money with finality (e.g. CHAPS, Fedwire) — no settlement risk but high liquidity need. Net settlement (e.g. BACS) batches and nets obligations, settling the net amount at set times — lower liquidity need but interim settlement/credit risk.

17. What is a lockbox and how does it accelerate collections?

    A lockbox is a bank-operated PO box where customers send payments; the bank collects, processes and credits them directly, providing data to the company. It accelerates collections by reducing mail float, processing time and the company's handling, speeding the conversion of receivables into available funds.

18. What are float and its main components in payment timing?

    Float is the time difference between a payment being initiated and the funds becoming available/cleared. Components: mail float (transit time), processing float (handling time), and clearing/availability float (bank clearing time). Treasurers seek to reduce collection float and may extend disbursement float.

19. What factors should a corporate consider when selecting and managing banking relationships?

    Credit quality/rating of the bank, geographic and product coverage, pricing/fees, service quality and relationship management, technology/connectivity, credit appetite (willingness to lend), regulatory standing, and the bank's role in the company's wider financing (wallet sharing for ancillary business).

20. What is a 'lead bank' or 'relationship bank' in a banking group structure?

    A lead/relationship bank is the principal bank coordinating a corporate's core banking services and often the main provider of credit and cash management. It typically heads a banking group/club, arranges syndicated facilities, and acts as the primary point of contact across products and geographies.

21. What is a header account (concentration account) in an account structure?

    A header (master/concentration) account is the top account in a hierarchy into which balances from subsidiary/sub-accounts are physically or notionally aggregated. It centralises cash for visibility, control and pooling, enabling the treasury to manage net group liquidity from a single point.

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