CTP CTP Cash Flow Management & Liquidity 1 — Questions and Answers
Question 1: Which tool is most commonly used in turnaround situations to project short-term cash needs and identify liquidity gaps?
- 13-week cash flow forecast (Correct answer)
- Annual income statement
- Balance sheet projection
- EBITDA bridge analysis
Correct answer: 13-week cash flow forecast
The 13-week cash flow forecast is the standard tool in distressed situations to track near-term liquidity on a rolling weekly basis.
Question 2: A company's Days Sales Outstanding (DSO) has increased from 35 to 62 days. What is the primary cash impact?
- Cash is tied up longer in receivables, reducing available liquidity (Correct answer)
- Cash flow improves because revenue recognition is delayed
- Inventory turnover improves proportionally
- Accounts payable decreases automatically
Correct answer: Cash is tied up longer in receivables, reducing available liquidity
Rising DSO means the company waits longer to collect cash from customers, directly tightening available working capital.
Question 3: In a distressed company, which working capital lever typically yields the fastest cash improvement?
- Accelerating accounts receivable collections (Correct answer)
- Purchasing new fixed assets
- Expanding product lines
- Increasing marketing spend
Correct answer: Accelerating accounts receivable collections
Accelerating collections reduces the receivables balance quickly, converting existing sales into usable cash without requiring new revenue.
Question 4: What does a negative cash conversion cycle indicate for a distressed business?
- The company collects cash from customers before paying suppliers, a favorable liquidity position (Correct answer)
- The company is insolvent and cannot meet obligations
- Fixed assets are depreciating faster than they generate revenue
- Operating expenses exceed gross profit
Correct answer: The company collects cash from customers before paying suppliers, a favorable liquidity position
A negative cash conversion cycle means the company funds operations with supplier credit rather than its own cash, which is a liquidity advantage.
Question 5: Which action is a CTP practitioner most likely to recommend to immediately preserve cash during a liquidity crisis?
- Implementing a payment moratorium on non-critical vendor invoices (Correct answer)
- Immediately paying all outstanding debt
- Accelerating capital expenditure projects
- Increasing employee headcount
Correct answer: Implementing a payment moratorium on non-critical vendor invoices
Temporarily deferring non-critical vendor payments conserves cash and buys time for the restructuring professional to develop a longer-term plan.
Question 6: What is a 'cash trap' in the context of a distressed business?
- A subsidiary or division that consumes cash without generating returns that justify the investment (Correct answer)
- A bank account restricted by a lender covenant
- An overdraft facility that has been fully drawn
- A tax escrow account held by the IRS
Correct answer: A subsidiary or division that consumes cash without generating returns that justify the investment
A cash trap is a business unit that drains liquidity from the parent company without producing adequate returns, and is a common divestiture candidate in turnarounds.
CTP CTP Cash Flow Management & Liquidity 1
Which tool is most commonly used in turnaround situations to project short-term cash needs and identify liquidity gaps?