TMA Cash Flow Management 2

Question 1

What is 'Days Sales Outstanding (DSO)' and why is it important in a turnaround?

Accepted Answer

The average number of days it takes to collect payment after a sale; a high DSO strains liquidity

Answer

DSO measures the average time to collect receivables; reducing DSO accelerates cash inflows and is one of the fastest ways to improve liquidity in a distressed company.

Question 2

What is 'factoring' and how is it used as a cash management tool in turnaround situations?

Accepted Answer

Selling accounts receivable to a third party at a discount to receive immediate cash

Answer

Factoring involves selling accounts receivable to a factor at a discount, providing immediate cash and transferring collection risk, which is useful when a distressed company needs quick liquidity.

Question 3

In a turnaround, 'working capital optimization' primarily focuses on which of the following?

Accepted Answer

Reducing the cash conversion cycle by managing receivables, inventory, and payables

Answer

Working capital optimization reduces the cash conversion cycle—the time it takes to convert investments in inventory and receivables back into cash—by collecting faster, reducing inventory, and extending payables.

Question 4

What is a 'cash dominion' provision in an asset-based lending agreement?

Accepted Answer

A requirement that all customer payments flow through a lender-controlled account and are applied to reduce the revolving balance

Answer

Cash dominion (or deposit account control) requires customer payments to be swept to a lender-controlled lockbox, with proceeds applied to reduce the revolving loan balance, giving lenders tight control over the borrower's liquidity.

Question 5

Which of the following is an example of a 'quick win' cash generation strategy commonly employed at the start of a turnaround?

Accepted Answer

Collecting overdue receivables and suspending non-essential capital expenditures

Answer

Quick wins in cash generation focus on immediate, low-complexity actions like accelerating overdue receivable collections and halting discretionary capex to stabilize liquidity without requiring complex restructuring.

TMA - Turnaround Management Association Practice Test

TMA - Turnaround Management Association Practice Test

TMA Cash Flow Management 2