TMA Cash Flow Management 3

Question 1

What is the difference between 'free cash flow' (FCF) and 'operating cash flow' (OCF) in the context of distressed company analysis?

Accepted Answer

OCF is cash generated from operations; FCF deducts capital expenditures to show cash available after maintaining or growing the asset base

Answer

Free cash flow subtracts capital expenditures from operating cash flow to show the cash truly available for debt service, reinvestment, or distribution, making it a more complete measure of financial health.

Question 2

What is a 'sale-leaseback' transaction and how does it generate liquidity for a distressed company?

Accepted Answer

A company sells a fixed asset to a buyer and simultaneously enters a lease to continue using the asset, receiving immediate cash proceeds

Answer

In a sale-leaseback, the company monetizes owned real estate or equipment by selling it to an investor and leasing it back, converting an illiquid asset into immediate cash while retaining operational use of the asset.

Question 3

What does 'Days Payable Outstanding (DPO)' measure, and what does a high DPO indicate?

Accepted Answer

The average days a company takes to pay its suppliers; a high DPO means the company is retaining cash longer

Answer

DPO measures how long a company takes to pay its vendors; a higher DPO means the company is holding onto cash longer by delaying supplier payments, which can be a conscious liquidity management strategy.

Question 4

What is a 'forbearance agreement' in the context of a distressed company's relationship with its lenders?

Accepted Answer

An agreement in which lenders agree not to exercise remedies on a defaulted loan for a specified period, allowing time for restructuring

Answer

A forbearance agreement is a temporary standstill in which lenders agree to refrain from enforcing default remedies, giving the company breathing room to develop and execute a restructuring plan.

Question 5

What is the 'cash conversion cycle' (CCC) and why is minimizing it a priority in a turnaround?

Accepted Answer

The number of days between a company's cash payment for inventory and the receipt of cash from customers; minimizing it frees up working capital

Answer

The cash conversion cycle (DIO + DSO - DPO) measures how long cash is tied up in operations; a shorter CCC means the company turns sales into cash faster, directly improving liquidity in a turnaround.

TMA - Turnaround Management Association Practice Test

TMA - Turnaround Management Association Practice Test

TMA Cash Flow Management 3