Treasury Management & Cash Flow Flashcards

What is the primary objective of treasury management for a CFO?

Answer: Ensuring liquidity, managing financial risk, and optimizing cash utilization

Treasury management focuses on maintaining sufficient liquidity, hedging financial risks, and deploying cash efficiently to support operations and strategic goals.

Which metric measures a company's ability to meet short-term obligations using only cash and cash equivalents?

Answer: Cash ratio

The cash ratio (cash and equivalents ÷ current liabilities) is the most conservative liquidity measure, excluding receivables and inventory.

The Cash Conversion Cycle (CCC) measures which of the following?

Answer: The number of days between paying for inventory and collecting cash from customers

CCC = DSO + DIO − DPO, representing the net days a company's cash is tied up in the operating cycle from inventory purchase to customer collection.

Which short-term instrument is most commonly used by CFOs to invest excess cash while maintaining liquidity?

Answer: Money market funds

Money market funds invest in high-quality, short-duration instruments and offer same-day liquidity with minimal credit risk, making them ideal for corporate cash management.

What does liquidity risk represent in the context of treasury management?

Answer: The risk that a company cannot meet its financial obligations as they come due

Liquidity risk is the danger that a firm lacks sufficient liquid assets or access to funding to honor its payment obligations when they fall due.

Cash pooling allows multinational corporations to:

Answer: Consolidate cash balances from multiple entities to minimize idle cash and reduce borrowing costs

Cash pooling (physical or notional) aggregates subsidiary balances so that surpluses in one entity offset deficits in another, reducing net external borrowing needs.

A rolling 13-week cash flow forecast is primarily used by a CFO to:

Answer: Anticipate short-term cash surpluses and deficits to manage liquidity proactively

A 13-week cash forecast provides near-term visibility into inflows and outflows, enabling proactive management of borrowing, investing, and payment timing.

A revolving credit facility differs from a term loan primarily because it:

Answer: Allows a borrower to draw, repay, and re-draw funds up to a committed limit during the facility period

A revolving credit facility provides flexible access to capital — the borrower can draw down and repay repeatedly, making it ideal for managing working capital fluctuations.

Which hedging instrument gives a company the right, but not the obligation, to buy or sell foreign currency at a predetermined rate?

Answer: Foreign currency option

A foreign currency option provides the right (not obligation) to transact at a set rate, offering downside protection while allowing participation in favorable rate movements.

Days Sales Outstanding (DSO) is calculated as:

Answer: (Accounts Receivable ÷ Total Revenue) × 365

DSO measures the average number of days to collect payment after a sale; lower DSO indicates faster collections and better cash flow.

A letter of credit (LC) issued by a bank in international trade primarily serves to:

Answer: Guarantee payment to the seller upon presentation of compliant shipping documents

An LC shifts payment risk from the buyer to the bank — the bank commits to pay the seller once the required trade documents are presented and verified.

Which working capital strategy involves deliberately extending the time taken to pay suppliers while staying within agreed credit terms?

Answer: Stretching Days Payable Outstanding (DPO)

Stretching DPO means paying suppliers at the latest contractually allowable date, preserving cash inside the business for a longer period.

A bank sweep account automatically:

Answer: Moves excess cash above a target balance into a higher-yielding investment account daily

Sweep accounts move surplus operating cash into overnight or short-term investments each evening, ensuring idle cash earns a return without manual intervention.

Which of the following best describes 'counterparty risk' in treasury operations?

Answer: The risk that the other party to a financial contract will fail to fulfill its obligations

Counterparty risk (credit risk) is the possibility that the other party in a transaction — such as a bank on a derivative — defaults before settlement.

A Treasury Management System (TMS) primarily helps a CFO by:

Answer: Centralizing cash visibility, automating bank reconciliation, and managing financial risk positions

A TMS integrates with banks and ERPs to provide real-time cash positioning, automate reconciliation, and manage hedging programs and debt portfolios from a single platform.

In a plain vanilla interest rate swap, Company A pays a fixed rate and receives a floating rate. This structure benefits Company A when:

Answer: Floating rates rise above the fixed rate paid

A fixed-rate payer benefits when floating rates rise because it receives more than it pays on the floating leg, resulting in a net receipt from the swap.

Commercial paper is best described as:

Answer: Short-term unsecured promissory notes issued by corporations to fund working capital

Commercial paper is a short-term (typically 1–270 days) unsecured debt instrument used by highly rated companies to finance short-term liabilities at rates below bank loans.

SOFR (Secured Overnight Financing Rate) replaced LIBOR primarily because:

Answer: SOFR is based on actual overnight Treasury repo transactions, making it more reliable and manipulation-resistant

Unlike LIBOR, which was based on bank submissions and susceptible to manipulation, SOFR reflects real transactions in the $1 trillion+ overnight Treasury repurchase market.

A zero-balance account (ZBA) in cash management operates by:

Answer: Automatically sweeping all funds to or from a master concentration account, keeping the ZBA balance at zero each day

A ZBA ends each day with a zero balance — disbursements are funded by drawing from the master account, and receipts are swept up to it, centralizing liquidity management.

Which trapped cash strategy is most commonly used by multinationals to repatriate cash from high-withholding-tax jurisdictions efficiently?

Answer: Using intercompany royalties, management fees, or interest payments to move cash to low-tax holding entities

Intercompany royalties, management fees, and loans are common treasury tools for moving cash across borders in a tax-efficient manner, subject to transfer pricing rules.