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

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.

Define cash pooling and state its two principal forms.

Cash pooling consolidates balances across multiple accounts to optimise interest and liquidity. The two principal forms are: 1) physical (zero/target-balance) cash concentration, where funds are physically swept; and 2) notional pooling, where balances are offset for interest purposes without moving funds.

How does physical cash concentration (zero-balancing) work?

In zero-balancing, end-of-day balances on participating accounts are automatically swept to (or funded from) a header account so each sub-account returns to zero (or a target). The header account then holds the net group cash, creating intercompany loan positions between entities and the header.

How does notional pooling work and how does it differ from physical pooling?

Notional pooling aggregates account balances only for interest calculation — the bank offsets debit and credit balances to compute net interest, but no funds physically move and each account keeps its own balance. Unlike physical pooling, it creates no intercompany loans, but requires cross-guarantees and may face regulatory/tax restrictions.

What are the main benefits and drawbacks of notional pooling versus physical concentration?

Notional pooling: no fund movement, no intercompany loans, preserves account autonomy — but needs cross-guarantees, may be banned in some jurisdictions, and capital rules can raise bank pricing. Physical concentration: works almost everywhere and gives true single balance — but creates intercompany loans (tax/legal admin) and requires actual transfers.

What is a target-balance sweep and how does it differ from zero-balancing?

A target-balance sweep moves funds so each sub-account is left at a defined non-zero target balance (e.g. a minimum operating buffer), rather than zero. Zero-balancing sweeps the account entirely to zero. Target balancing retains local working cash while still concentrating surplus.

What is intercompany lending and why is it used in treasury?

Intercompany lending is the provision of loans between entities within the same group (e.g. parent to subsidiary). It is used to redistribute internal liquidity efficiently, fund subsidiaries cheaply without external borrowing, repatriate cash, and optimise the group's overall funding and tax position.

What is netting in a multilateral group context and what does it achieve?

Netting offsets intercompany payables and receivables so only net amounts are settled. Multilateral netting routes all intercompany flows through a netting centre, reducing the number and value of cross-border payments — cutting transaction costs, FX spreads, and float, while improving control.

Distinguish bilateral netting from multilateral netting.

Bilateral netting offsets amounts owed between just two parties, settling the single net balance. Multilateral netting offsets the obligations of many group entities simultaneously through a central netting centre, calculating each entity's net position against the centre — far greater payment reduction than bilateral.

What is a payment factory / in-house bank?

An in-house bank is a centralised treasury function that acts as a bank to group entities, running intercompany accounts (POBO/COBO), netting and internal funding. A payment factory centralises external payment execution. Together they reduce external accounts, banking costs and operational risk while improving control and visibility.

What is a liquidity buffer and what is its purpose?

A liquidity buffer is a deliberately held reserve of cash and highly liquid, low-risk assets (plus committed undrawn facilities) maintained to meet unexpected outflows or loss of funding access. Its purpose is to ensure the firm can meet obligations under stress without forced asset sales or default.

What components typically make up a corporate's liquidity buffer?

1) Operating cash for day-to-day needs; 2) A precautionary reserve of cash/short-dated marketable instruments; 3) Committed, undrawn backup facilities (e.g. revolving credit facilities, commercial paper backstop lines). Sizing reflects cash flow volatility, market access and stress scenarios.

What is a contingency funding plan (CFP)?

A contingency funding plan is a documented framework setting out actions, sources of liquidity, triggers and responsibilities to maintain funding in a stress event. It identifies early-warning indicators, alternative funding sources, and an escalation/governance process to manage a liquidity crisis.

What is trapped cash and what typically causes it?

Trapped cash is cash held by a group entity that cannot be readily moved to where it is needed. Causes include foreign exchange controls/capital restrictions, withholding taxes on repatriation, regulatory minimum balances, dividend limitations, joint-venture/minority constraints, and undercapitalised entities.

Name common methods to repatriate or release trapped cash.

Dividends, intercompany loans, royalty/licence fees, management/service charges, transfer pricing on intercompany trade, share buybacks/capital reductions, and re-invoicing. Each must respect local exchange controls, tax (withholding, transfer pricing) and legal rules; documentation and substance are essential.

What is withholding tax and how does it affect cash repatriation?

Withholding tax is tax deducted at source by the paying country on cross-border payments such as dividends, interest or royalties. It reduces the net cash repatriated; double-tax treaties may lower or eliminate it. Treasurers structure flows to minimise leakage while remaining compliant.

List the principal money market instruments used for short-term investment.

Treasury bills (T-bills), certificates of deposit (CDs), commercial paper (CP), bankers' acceptances, repurchase agreements (repos), and money market funds (MMFs). All are short-dated (typically under one year), highly liquid, low-credit-risk instruments.

What is a Treasury bill and how is its return earned?

A Treasury bill is a short-dated (e.g. 1, 3 or 6 month) government debt instrument issued at a discount to face value and redeemed at par; it pays no coupon. The investor's return is the difference between the discounted purchase price and the par value received at maturity.

What is a certificate of deposit (CD)?

A certificate of deposit is a negotiable instrument issued by a bank evidencing a time deposit of a fixed sum for a fixed term at a stated interest rate. Being negotiable, it can be sold in the secondary market before maturity, giving the holder liquidity.

What is commercial paper (CP)?

Commercial paper is unsecured, short-term (typically up to 270 days) debt issued at a discount by large, creditworthy corporations and financial institutions to fund working capital. It is usually backed by committed bank facilities and is cheaper than bank borrowing for strong-rated issuers.

What is a repurchase agreement (repo) and how does it function as a money market instrument?

A repo is the sale of securities with an agreement to repurchase them at a higher price on a future date — effectively a secured (collateralised) short-term loan. The price difference is the implied interest (repo rate). It offers low-risk, collateralised investing/funding of cash.

What are money market funds (MMFs) and why do treasurers use them?

MMFs are pooled investment funds investing in diversified short-term, high-quality instruments. Treasurers use them for same-day liquidity, diversification of counterparty/credit risk, professional management, and a competitive yield on surplus cash without managing individual instruments. Types include CNAV, LVNAV and VNAV funds.

What are the three core objectives of a corporate investment policy for surplus cash, and their usual priority?

Security (preservation of capital), Liquidity (access to funds when needed), and Yield (return). The standard priority is Security first, then Liquidity, then Yield (S-L-Y). Yield is pursued only after capital safety and liquidity needs are satisfied.

What key parameters does an investment policy typically specify to control risk?

Permitted instrument types, minimum counterparty credit ratings, concentration/exposure limits per counterparty, maximum maturities, currency restrictions, total portfolio limits, and authorised dealers/signatories. These enforce diversification and capital preservation.

List common short-term borrowing instruments available to corporates.

Bank overdrafts, revolving credit facilities (RCFs), short-term/money-market loans, commercial paper programmes, trade finance (factoring, invoice discounting, letters of credit), and committed/uncommitted lines of credit.

What is the difference between a committed and an uncommitted credit facility?

A committed facility legally obliges the bank to lend up to an agreed limit over a set period (subject to covenants), usually for a commitment fee — providing reliable backup liquidity. An uncommitted facility (e.g. typical overdraft) can be withdrawn by the bank at any time, so it is cheaper but unreliable for contingency.

What is a revolving credit facility (RCF)?

An RCF is a committed bank facility allowing a borrower to draw, repay and redraw funds up to a set limit over the facility term. It provides flexible standby liquidity, often backstops commercial paper, and charges interest on drawn amounts plus a commitment fee on the undrawn portion.

What is the difference between yield basis and discount basis quotation for money market instruments?

On a yield (interest-bearing) basis, return is quoted as interest added to the principal (e.g. CDs, deposits). On a discount basis, the instrument is bought below par and redeemed at par (e.g. T-bills, CP); the quoted discount rate understates the true yield because it is expressed on face value, not on the lower purchase price.

How do you convert a discount rate to a true (money market) yield? Give the relationship.

$$\text{Yield} = \frac{\text{Discount rate}}{1 - \left(\text{Discount rate} \times \frac{days}{B}\right)}$$ where $B$ is the day-count basis (e.g. 360 or 365). The true yield exceeds the discount rate because the investment outlay is the discounted price, not the face value.

State the day-count conventions for GBP versus USD/EUR money market instruments.

Sterling (GBP) money markets use an actual/365 basis. US dollar and euro money markets use an actual/360 basis. The basis affects interest calculations: $\text{Interest} = \text{Principal} \times \text{rate} \times \frac{days}{B}$, where $B = 365$ for GBP and $360$ for USD/EUR.

Calculate the simple interest on a money market deposit. Give the formula.

$$\text{Interest} = P \times r \times \frac{days}{B}$$ where $P$ = principal, $r$ = annual interest rate, $days$ = days to maturity, and $B$ = day-count basis (365 for GBP, 360 for USD/EUR).

How is the price (proceeds) of a discount instrument such as a T-bill calculated?

$$P = F \times \left(1 - d \times \frac{days}{B}\right)$$ where $F$ = face value, $d$ = discount rate, $days$ = days to maturity, $B$ = day-count basis. The investor pays $P$ and receives $F$ at maturity.

What is the effective annual rate (EAR) and how does it differ from a nominal rate?

The effective annual rate reflects compounding over the year: $$EAR = \left(1 + \frac{r}{n}\right)^{n} - 1$$ where $r$ is the nominal annual rate and $n$ the number of compounding periods. It exceeds the nominal rate when $n>1$, allowing comparison of instruments with different compounding frequencies.

What are the main techniques for managing trade receivables to improve cash flow?

Clear credit policy and credit checks/limits, prompt and accurate invoicing, agreed terms, early-payment (settlement) discounts, efficient collection/dunning processes, monitoring DSO and ageing, and using factoring or invoice discounting to accelerate cash. Goal: reduce DSO and bad debt while maintaining sales.

Explain the trade-off in offering settlement (early-payment) discounts to customers.

An early-payment discount accelerates cash collection and reduces DSO and bad-debt risk, but it costs revenue/margin. The implied annualised cost can be high — e.g. '2/10 net 30' costs roughly $\frac{2}{98} \times \frac{365}{20} \approx 37\%$ p.a. — so it should be offered only if cheaper than alternative funding.

What is the difference between factoring and invoice discounting?

Both raise cash against receivables. Factoring: the provider buys/manages the sales ledger, advances ~80-90% of invoice value, handles collections, and the arrangement is usually disclosed to customers; may be with or without recourse. Invoice discounting: confidential financing against receivables where the company retains its own ledger and collections.

What are the main techniques for managing trade payables?

Negotiating favourable credit terms, paying on (not before) due date to maximise DPO without losing discounts/relationships, evaluating early-payment discounts on a cost basis, centralising/scheduling payments, using supply-chain finance, and maintaining supplier relationships. Goal: optimise cash retention without damaging supply or reputation.

What is supply chain finance (reverse factoring)?

Supply chain finance (reverse factoring) is a buyer-led arrangement where a financier pays the buyer's approved supplier invoices early at a discount based on the buyer's (stronger) credit rating, while the buyer pays the financier on the original or extended due date. Suppliers get cheap early cash; the buyer can extend DPO.

Describe the inventory-versus-cash trade-off in working capital management.

Holding more inventory ties up cash and incurs holding costs (storage, insurance, obsolescence, financing) but reduces stockout risk and ordering costs and supports service levels. Less inventory frees cash and cuts holding costs but raises stockout and disruption risk. Treasury seeks the level minimising total cost while protecting operations.

What is the Economic Order Quantity (EOQ) and its formula?

EOQ is the order size minimising total ordering and holding costs: $$EOQ = \sqrt{\frac{2DS}{H}}$$ where $D$ = annual demand, $S$ = cost per order, and $H$ = holding cost per unit per year. It balances fewer-but-larger orders (lower ordering cost) against higher inventory holding cost.

What is just-in-time (JIT) inventory and its cash impact?

JIT minimises inventory by receiving goods only as needed for production/sale, reducing inventory holding, freeing cash and lowering holding costs and obsolescence. The trade-off is greater vulnerability to supply disruption and the need for reliable suppliers and tight coordination.

Define the current ratio and the quick (acid-test) ratio.

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ measures short-term solvency. $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$ excludes less-liquid inventory for a stricter liquidity test.

What is working capital and how is net working capital calculated?

Working capital is the capital used in day-to-day operations. Net working capital is: $$NWC = \text{Current Assets} - \text{Current Liabilities}$$ Positive NWC means current assets exceed current liabilities; managing it efficiently frees cash and reduces financing needs.

Why is benchmarking working capital metrics important, and against what should they be compared?

Benchmarking reveals whether working-capital performance is competitive and where cash can be released. Metrics (DSO, DIO, DPO, CCC, current/quick ratios) should be compared against industry peers, sector averages, the company's own historical trend, and budget/targets, since 'good' levels vary widely by industry.