CCM Cash Forecasting and Liquidity Management 2 — Questions and Answers
Question 1: Which technique spreads cash inflows and outflows across multiple scenarios to test how liquidity holds up under different assumptions?
- Variance analysis
- Scenario analysis (Correct answer)
- Trend extrapolation
- Ratio analysis
Correct answer: Scenario analysis
Scenario analysis evaluates cash positions under multiple defined circumstances (e.g., best case, base case, worst case) to assess liquidity resilience.
Question 2: A company uses a target cash balance model. If the optimal cash balance is $2 million and the current balance is $500,000, the treasurer should:
- Invest the surplus in short-term securities
- Borrow or liquidate investments to raise cash to the target (Correct answer)
- Accelerate accounts payable payments
- Reduce the credit line immediately
Correct answer: Borrow or liquidate investments to raise cash to the target
When the current cash balance falls below the optimal target, the treasurer should borrow or liquidate investments to bring the balance back to the target level.
Question 3: The Baumol model for optimal cash balance assumes which of the following?
- Cash outflows are random and unpredictable
- Cash is used at a steady, predictable rate (Correct answer)
- Inflation has a major impact on cash needs
- Receivables collection is the primary variable
Correct answer: Cash is used at a steady, predictable rate
The Baumol model assumes cash is used at a constant rate, making it analogous to an economic order quantity model applied to cash management.
Question 4: In the Miller-Orr cash management model, what triggers a decision to invest excess cash in short-term securities?
- Cash balance falls to the lower control limit
- Cash balance rises to the upper control limit (Correct answer)
- Cash balance reaches the return point
- Net income exceeds a threshold
Correct answer: Cash balance rises to the upper control limit
In the Miller-Orr model, the firm invests excess cash when the balance hits the upper control limit, reducing it back to the return point.
Question 5: Which of the following is a primary external factor that a cash manager must incorporate into a long-term liquidity forecast?
- Individual employee performance reviews
- Macroeconomic indicators such as interest rate trends (Correct answer)
- Internal IT system upgrade schedules
- Departmental office supply budgets
Correct answer: Macroeconomic indicators such as interest rate trends
Macroeconomic indicators like interest rate trends affect borrowing costs, investment yields, and customer payment behavior, all critical to long-term liquidity planning.
Question 6: A company has a days sales outstanding (DSO) of 55 days and days payable outstanding (DPO) of 30 days, with days inventory outstanding (DIO) of 25 days. What is the cash conversion cycle?
- 50 days (Correct answer)
- 60 days
- 80 days
- 110 days
Correct answer: 50 days
CCC = DSO + DIO - DPO = 55 + 25 - 30 = 50 days.
Question 7: Which cash forecasting horizon is typically used for strategic planning purposes such as capital expenditure decisions?
- Daily forecast (1-7 days)
- Short-term forecast (1-13 weeks)
- Medium-term forecast (1-12 months)
- Long-term forecast (1-5 years) (Correct answer)
Correct answer: Long-term forecast (1-5 years)
Long-term forecasts spanning one to five years are used for strategic decisions like capital expenditures, major borrowings, and business expansion planning.
CCM Cash Forecasting and Liquidity Management 2
Which technique spreads cash inflows and outflows across multiple scenarios to test how liquidity holds up under different assumptions?