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

24 sample cards from the Cash and Liquidity Management deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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 An uncommitted facility (e.g. typical overdraft) can be withdrawn by the bank at any time, so it is cheaper but unreliable for contingency.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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).

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

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