TMA Cash Flow Management 1 â Questions and Answers
Question 1: What is the primary purpose of a 13-week cash flow forecast in a turnaround situation?
- To project annual earnings before interest and taxes
- To provide a near-term, rolling view of liquidity and cash needs (Correct answer)
- To estimate the company's long-term enterprise value
- To calculate the company's debt-to-equity ratio
Correct answer: To provide a near-term, rolling view of liquidity and cash needs
A 13-week cash flow forecast gives turnaround professionals a rolling, week-by-week view of cash inflows and outflows to manage immediate liquidity needs and communicate with stakeholders.
Question 2: Which type of lending arrangement is most commonly used to provide liquidity to distressed companies based on the value of their receivables and inventory?
- Mezzanine financing
- Term loan B
- Asset-based lending (ABL) (Correct answer)
- Convertible note financing
Correct answer: Asset-based lending (ABL)
Asset-based lending (ABL) provides a revolving credit facility secured by a borrowing base calculated from eligible receivables and inventory, making it well-suited for distressed borrowers.
Question 3: What does 'cash burn rate' measure in a distressed company context?
- The rate at which the company depreciates fixed assets
- The speed at which the company collects outstanding receivables
- The net amount of cash the company consumes per period when operating at a loss (Correct answer)
- The pace at which inventory is converted to revenue
Correct answer: The net amount of cash the company consumes per period when operating at a loss
Cash burn rate measures how quickly a company is using up its available cash reserves when expenses exceed revenue, which is critical for determining how long a distressed company can survive without intervention.
Question 4: In a turnaround, which forecasting method builds cash flow projections from individual receipts and disbursements rather than from income statement projections?
- Indirect method forecasting
- Direct method forecasting (Correct answer)
- Regression-based forecasting
- Top-down forecasting
Correct answer: Direct method forecasting
The direct method builds cash flow projections from actual expected cash receipts and payments, providing greater precision and reliability for short-term liquidity management in turnaround situations.
Question 5: What is a 'borrowing base' in the context of asset-based lending?
- The total outstanding debt on a company's balance sheet
- The maximum credit limit established by the lender regardless of asset values
- The formula-driven calculation of eligible collateral that determines the maximum available credit (Correct answer)
- The base interest rate applied to the loan before spread is added
Correct answer: The formula-driven calculation of eligible collateral that determines the maximum available credit
A borrowing base is the formula-driven calculationâtypically a percentage of eligible receivables plus eligible inventoryâthat determines the maximum amount a borrower can draw under an ABL facility.
Question 6: What does 'DIP financing' stand for and why is it critical in a Chapter 11 restructuring?
- Debt-in-Place financing; it preserves existing debt covenants during bankruptcy
- Debtor-in-Possession financing; it provides liquidity to operate the business during the bankruptcy process (Correct answer)
- Default-Interest-Premium financing; it compensates lenders for increased credit risk
- Distressed Investment Placement financing; it attracts new equity investors
Correct answer: Debtor-in-Possession financing; it provides liquidity to operate the business during the bankruptcy process
Debtor-in-Possession (DIP) financing provides a bankrupt company with the cash needed to fund operations during Chapter 11, with lenders receiving super-priority status over pre-petition creditors.
Question 7: Which of the following actions is typically prioritized first when a turnaround advisor identifies a severe cash crisis?
- Filing for Chapter 11 bankruptcy protection immediately
- Issuing new equity to dilute existing shareholders
- Implementing a cash conservation plan and identifying immediate liquidity levers (Correct answer)
- Renegotiating all long-term supply contracts
Correct answer: Implementing a cash conservation plan and identifying immediate liquidity levers
Turnaround advisors first implement a cash conservation planâhalting discretionary spending, accelerating collections, and stretching payablesâto stabilize liquidity before pursuing longer-term solutions.
TMA Cash Flow Management 1
What is the primary purpose of a 13-week cash flow forecast in a turnaround situation?