Why can a profitable company face a cash shortage?

Profit records revenue and expenses under accounting rules, while liquidity depends on when money actually moves. A company might record a $1 million sale today but collect it in 60 days, while a $700,000 supplier payment is due next week. Treasury forecasts the collection and payment dates, checks available balances and funding capacity, then arranges a bridge if needed.

How should treasury choose between investing surplus cash and reducing borrowing?

Compare the after-tax, risk-adjusted return on an investment with the avoidable cost of debt, while preserving required liquidity. If $1 million of surplus cash earns 4% but a repayable borrowing costs 7%, repayment saves about $30,000 a year before tax and other effects. The decision changes if repayment triggers a penalty or the cash is needed before the debt can be redrawn.

What is the difference between measuring an exposure and hedging it?

Measurement identifies the amount, currency or rate, timing, and sensitivity of a future cash flow. Hedging changes how that cash flow responds to market moves. A €1 million payable rises by $50,000 if the dollar price of a euro moves from $1.10 to $1.15. A forward contract at $1.12 fixes the dollar payment at $1.12 million, subject to the contract's terms and counterparty performance.

Certified Treasury Professional (CTP) Study Guide

Start with concept 1 Choose a topic

A treasury decision starts with a practical question: where will cash be needed, when will it be available, and what could prevent it from arriving? This guide builds from daily cash positioning and working capital through long-term financing, investments, service-provider relationships, and risk control. Each concept pairs a decision rule with a resolved example so you can see what a calculation means for the next action. Pay attention to timing as well as totals: a company can be profitable yet unable to fund a payment due today. The examples use stated assumptions rather than universal rates or limits. As you work through them, connect each transaction to the underlying cash flow, obligation, counterparty, and control.

Maintain corporate liquidity required to meet current and future obligations in a timely and cost effective manner

1. Set the daily cash position

A daily cash position estimates what treasury can use after expected transactions settle. Start with available opening cash, add receipts expected to become usable today, and subtract payments expected to leave today. Compare the result with an operating floor that covers routine uncertainty and immediate needs. Only the excess is a candidate for investment. A positive bank balance alone does not establish an investable surplus: restricted funds, uncleared receipts, pending payments, and account-specific requirements may reduce usable cash. Check the timing within the day as well as the closing figure, since a payment can arrive before its funding receipt. Then choose an investment whose maturity and access terms fit the next forecast need. The CTP candidate handbook places cash positioning, short-term investing, and borrowing within treasury's liquidity work.

Worked example: Suppose opening usable cash is $2.0 million, today's collectible receipts are $1.3 million, and payments settling today total $2.7 million. Forecast closing cash is $2.0 million + $1.3 million − $2.7 million = $0.6 million. With an assumed $0.4 million operating floor, the maximum apparent surplus is $0.2 million. Treasury could invest that amount only if the investment remains available when the forecast next requires it.

Watch the distinction: Treating all $0.6 million of closing cash as surplus ignores the $0.4 million needed for operations. The investable amount is the excess above that floor, subject to timing.

Reference: [1]

2. Distinguish bank and book balances

The bank balance records transactions the bank has processed; the book balance records transactions the company has entered. Their dates can differ without either record being wrong. A deposit recorded in the ledger but still in transit is added to the bank balance during reconciliation. An issued check recorded as a payment but not yet presented is subtracted from the bank balance. After those timing items, compare the adjusted bank figure with the ledger. Any remaining difference calls for investigation, such as a bank fee, interest credit, posting error, duplicate entry, or an unrecorded bank transaction. Keep each reconciling item identifiable so it can be checked when it clears. For cash positioning, distinguish a reconciled accounting balance from money actually available to fund a payment at a particular cutoff.

Worked example: The statement shows $540,000. The company has recorded $40,000 of deposits that the bank has not processed and $80,000 of issued checks that have not cleared. Adjusted bank cash is $540,000 + $40,000 − $80,000 = $500,000. If the ledger also shows $500,000, these timing items explain the difference. Treasury should still track their later clearance rather than leave them unresolved indefinitely.

Watch the distinction: Adding outstanding checks to the bank balance reverses their effect. Those checks are already deducted in the ledger, so subtract them from the bank side to compare like balances.

Reference: [1]

3. Read liquidity ratios together

The current ratio divides current assets by current liabilities and gives a broad measure of short-term coverage. The quick ratio removes inventory and other assets that cannot readily be turned into cash, then divides by the same liabilities. Read them together: a healthy-looking current ratio can conceal reliance on selling stock before bills come due. Neither ratio supplies a payment calendar or proves that receivables will be collected on time. Inspect the age and quality of receivables, the availability of cash, and the timing of liabilities before drawing a funding conclusion. Inventory may also be essential to future sales, so liquidating it can damage operations. Use the gap between ratios as a diagnostic cue, then move to a dated cash forecast to test whether obligations can actually be met.

Worked example: Assume current assets of $3.0 million include $1.4 million of inventory, with current liabilities of $2.0 million and no other quick-ratio exclusions. The current ratio is $3.0 million ÷ $2.0 million = 1.5. The quick ratio is ($3.0 million − $1.4 million) ÷ $2.0 million = 0.8. Inventory accounts for much of the apparent coverage, so collection and payment timing deserve closer review.

Watch the distinction: A current ratio above 1 does not mean every near-term bill is funded. Some assets may be slow to convert, while liabilities can fall due before cash arrives.

Reference: [1]

4. Build a dated cash forecast

A dated cash forecast places each expected receipt and disbursement on the day funds are likely to settle, then rolls the closing balance into the next day's opening balance. Use bank value dates and payment cutoffs where they affect availability. Separate confirmed items from uncertain estimates so a delayed customer receipt does not appear as dependable funding. Compare each day's lowest projected balance with the operating minimum, and arrange financing early enough to clear before the gap occurs. A month-end total can hide a shortfall on an earlier date, even when the overall month shows a surplus. Revisit the forecast as invoices, payroll, taxes, and collection information change. This timing discipline connects treasury's funding decisions with the assumptions used by the corporate FP&A study guide, while treasury remains responsible for settlement-day cash.

Worked example: A day opens with $100,000 of usable cash. Expected receipts of $250,000 raise available funds to $350,000, assuming they settle before payments. Payments of $310,000 leave $40,000. If the assumed minimum is $60,000, the day has a $20,000 funding gap. Treasury must make at least $20,000 available before the relevant payment cutoff; a later receipt cannot cure an earlier missed settlement.

Watch the distinction: Netting an entire week's inflows against outflows can hide a daily deficit. Place transactions on settlement dates and check the balance at each funding deadline.

Reference: [1]

5. Explain forecast variance

Forecast variance is actual cash flow minus forecast cash flow, using a consistent sign convention. Split the result into receipts and payments before looking for a cause. A receipt shortfall may reflect late customer payment, an inaccurate collection assumption, or incorrect bank availability timing. A payment excess may reflect an unplanned purchase, an early settlement, or a missing file. The two errors can offset each other in a net figure, so a small net variance does not necessarily imply a sound forecast. Compare by source, owner, and date; then adjust the forecast rule that produced a repeated error. Distinguish a timing shift from a permanent amount change, since a late receipt should move into a later period. The purpose is to improve funding decisions, not merely to explain yesterday's arithmetic.

Worked example: Forecast receipts were $500,000 and forecast payments were $420,000, giving an $80,000 net inflow. Actual receipts were $460,000, a $40,000 shortfall; actual payments were $450,000, a $30,000 excess. Actual net inflow was $460,000 − $450,000 = $10,000. The net variance is $10,000 − $80,000 = −$70,000. Investigate collections and disbursements separately because both weakened the result.

Watch the distinction: Calling the entire $70,000 variance a collection problem overlooks $30,000 of extra payments. Correcting only receipt assumptions would leave the payment forecast unreliable.

Reference: [1]

6. Stress a liquidity forecast

A liquidity stress test changes a plausible cash-flow assumption and recalculates the lowest forecast balance. Timing shocks are especially important: a customer may still pay in full, yet pay after a critical disbursement. Begin with a dated baseline, remove or defer the stressed receipt, and compare the revised balance with the operating floor. Headroom is the stressed balance above that floor. If headroom is thin, identify actions that can be executed before the affected cutoff, such as drawing usable credit, moving unrestricted cash, or rescheduling discretionary spending. Check whether those actions themselves have limits, fees, or settlement delays. A scenario is a planning device rather than a prediction. Its value is showing which assumptions create a funding problem and how much response time remains.

Worked example: Suppose baseline closing cash is $300,000 and includes a $180,000 customer receipt. If that receipt moves to the following day, stressed closing cash becomes $300,000 − $180,000 = $120,000. Against an assumed $100,000 floor, headroom is only $20,000. An additional $30,000 same-day outflow would create a $10,000 shortfall, so treasury should prepare funding before relying on the delayed receipt.

Watch the distinction: A stressed balance above zero is not automatically safe. Compare it with the operating floor and the timing of further payments, not just with zero.

Reference: [1]

7. Calculate the cash conversion cycle

The cash conversion cycle estimates the time between paying suppliers for operating inputs and collecting cash from customers. Add days inventory outstanding to days sales outstanding, then subtract days payables outstanding. Inventory days represent time before goods are sold; receivable days represent time after sale before collection; payable days delay the cash outflow to suppliers. A longer cycle generally requires more funding for a given scale of activity. Diagnose the component causing change rather than treating the total as a single lever. Faster collections can help, but overly strict terms may harm sales; stretching supplier payments can strain relationships or sacrifice discounts. The measure uses averages, so seasonal peaks and individual due dates still need a cash forecast. Try a separate worked problem in the CTP practice questions after checking this sequence.

Worked example: Assume days sales outstanding of 40, inventory days of 50, and payables days of 35, all measured on a comparable basis. The cash conversion cycle is 40 + 50 − 35 = 55 days. Roughly 55 days pass between the modeled supplier cash outflow and customer collection. If collection time alone fell to 37 days, the cycle would become 52 days, releasing cash sooner.

Watch the distinction: Adding payables days makes the cycle look longer when suppliers allow more time to pay. Payables days delay the outflow, so subtract them.

Reference: [1]

8. Value faster collections

Days sales outstanding links receivables to the pace of credit sales. If sales are steady, each day removed from average collection time releases approximately one day's sales from receivables. Estimate daily credit sales using a stated period, multiply by the reduction in days, and interpret the result as a working-capital release rather than new revenue. The cash appears as older invoices are collected sooner; it is not a recurring annual profit. Check whether the proposed change is achievable through accurate invoicing, easier payment, dispute resolution, or credit terms. Also test whether faster collection would require discounts or harm customers. When sales vary sharply, a simple daily average can misstate the release, so use a forecast by customer and due date for a funding decision.

Worked example: A company makes $900,000 of credit sales over 30 days, averaging $900,000 ÷ 30 = $30,000 per day. Assume sales stay steady and collection time falls from 45 to 40 days. The five-day reduction releases about 5 × $30,000 = $150,000 from receivables. It is an approximate one-time reduction in cash tied up, before any cost of achieving faster payment.

Watch the distinction: Treating the $150,000 release as extra sales confuses a balance-sheet improvement with revenue. The same sales are collected earlier, reducing receivables and raising cash.

Reference: [1]

9. Evaluate supplier discounts

A supplier discount can be viewed as a return on paying early. Under terms written 2/10 net 30, the buyer may deduct 2% by paying on day 10 or pay the full invoice on day 30. The relevant financing decision is whether to advance the discounted payment for 20 days in exchange for the discount. Divide the discount by the early amount paid, then annualize over the days accelerated using an explicit day basis. Compare that approximate return with the marginal cost of cash, including borrowing fees and any strain on the operating floor. Also verify that the invoice is valid and the payment will meet the discount deadline. The annualized figure is a comparison tool; the actual saving on one invoice remains the stated discount.

Worked example: On a $100,000 invoice with 2/10 net 30 terms, payment on day 10 is $98,000 and saves $2,000 against day 30. Advancing $98,000 for 20 days earns $2,000 ÷ $98,000 = 2.0408% over that period. On a 365-day simple basis, 2.0408% × 365 ÷ 20 = 37.24% approximately. If usable funding costs less and liquidity remains adequate, early payment is attractive.

Watch the distinction: Dividing $2,000 by $100,000 understates the return on cash advanced. Treasury pays $98,000 early, so that is the comparison base.

Reference: [1]

10. Measure inventory's cash demand

Inventory consumes cash between supplier payment and sale. Days inventory outstanding translates that balance into the number of days of cost of goods sold held on average. To estimate cash released by a reduction in inventory days, divide annual cost of goods sold by the number of days in the chosen year basis, then multiply by days removed. Use cost rather than selling price because inventory is carried at cost for this working-capital estimate. The result assumes a stable sales and production pace; seasonality or changing input prices call for a more detailed model. Before targeting fewer days, check lead times, order variability, safety stock, and the cost of shortages. Treasury can quantify the funding benefit, while operations determines whether the inventory change is feasible without damaging service.

Worked example: Annual cost of goods sold is $7.3 million. Using 365 days, average cost per day is $7,300,000 ÷ 365 = $20,000. If inventory falls by four days at the same operating pace, the approximate cash release is 4 × $20,000 = $80,000. That benefit depends on maintaining supply continuity and customer service; a shortage could outweigh the funding gain.

Watch the distinction: Using sales revenue per day overstates the inventory cash release because it includes gross margin. Estimate inventory at cost, then examine operational consequences separately.

Reference: [1]

11. Compare short-term investment yields

To compare a short-term security with another use of cash, first find what the investor earns over the actual holding period. For a security bought below its redemption amount, gain equals redemption proceeds minus purchase price. Holding-period return divides that gain by the cash invested. A simple annualized yield multiplies the holding-period return by the stated year basis divided by days held. State the basis because a 360-day convention and a 365-day convention produce different quoted figures. This simple conversion is useful for comparing short periods, but it does not represent a compounded annual return. Yield also cannot replace checks on credit quality, marketability, currency, and whether the security matures before the cash is needed. A higher quoted yield may be unsuitable if accessing funds early requires a loss.

Worked example: A security costs $99,000 today and pays $100,000 in 90 days, assuming no fees or default. Gain is $1,000. The holding-period return is $1,000 ÷ $99,000 = 1.0101%. On a 365-day simple basis, annualized yield is 1.0101% × 365 ÷ 90 = 4.0965%, about 4.10%. Treasury must still match the 90-day maturity to its forecast need.

Watch the distinction: Using the $100,000 redemption value as the return denominator understates the yield. The investor commits $99,000, which is the amount earning the $1,000 gain.

Reference: [1]

12. Ladder investment maturities

An investment ladder spreads maturities across dates when cash is expected to be needed. Compare cumulative usable maturities with cumulative obligations at each date, allowing for other available cash only when the problem supplies it. A later maturity cannot fund an earlier payment unless the security can be sold or pledged in time, potentially at a cost. Size near-term rungs first, then consider yield on money that can remain invested longer. Leave room for forecast error rather than placing every available dollar at the latest possible date. When an obligation moves, update the ladder and examine early-sale risk. The decision sequence is timing, liquidity, credit exposure, and then return. This makes the investment portfolio support the cash forecast instead of forcing treasury to borrow while it holds assets that mature too late.

Worked example: Assume there is no other available cash. Investments of $200,000 mature on day 30 and $300,000 on day 60, while a $250,000 payment falls due on day 30. The day-30 shortage is $250,000 − $200,000 = $50,000. Shifting at least $50,000 from the day-60 placement to an eligible investment maturing by day 30 closes that timing gap, before any added liquidity cushion.

Watch the distinction: Adding both maturities gives $500,000 and seems to cover the $250,000 payment. The day-60 proceeds arrive too late to fund a day-30 obligation.

Reference: [1]

13. Find the full cost of short-term borrowing

The stated interest rate is only one part of short-term borrowing cost. Calculate interest from principal, annual rate, and the loan's actual term using the specified day basis. Add origination or other unavoidable fees to find the cash cost for that term. To compare offers, express total cost against the amount of funds actually received or available, then annualize consistently. A fee deducted from proceeds reduces usable cash and can raise the effective rate further. Also compare repayment dates with forecast receipts, because refinancing risk can matter more than a small rate difference. Keep the calculation's assumptions visible: simple interest, constant balance, one fee, and no other charges. A quoted annualized rate is a comparison measure, not the dollar amount the company will pay over the short loan.

Worked example: A $1,000,000 loan runs 60 days at 6% simple annual interest on a 365-day basis, plus a $2,000 fee paid separately. Interest is $1,000,000 × 0.06 × 60 ÷ 365 = $9,863.01. Total 60-day cost is $11,863.01. Relative to $1,000,000 received, simple annualized cost is $11,863.01 ÷ $1,000,000 × 365 ÷ 60 = 7.22% approximately.

Watch the distinction: Comparing this loan as a 6% offer ignores the fee. Include unavoidable charges and specify whether fees reduce proceeds before judging the full cost.

Reference: [1]

14. Calculate available facility capacity

Facility capacity is the committed limit less every use that counts against it. Drawn loans are obvious uses, but a letter of credit or other contingent obligation may also consume capacity under the agreement. Read the facility terms to identify shared sublimits, currencies, expiration dates, and any borrowing conditions. Then distinguish nominal unused capacity from funds that can actually be drawn before a payment deadline. A covenant problem, unmet notice requirement, or delayed draw process may reduce practical availability. Update the calculation as drawings are repaid or new commitments are issued. This matters in a liquidity stress test: a facility can appear large while much of it is already supporting other obligations. Treasury should size a funding response from usable headroom, with enough time for the draw to settle.

Worked example: A facility limit is $3.0 million. Loans drawn total $1.2 million, and letters of credit consume $0.4 million under the assumed shared limit. Unused nominal capacity is $3.0 million − $1.2 million − $0.4 million = $1.4 million. If a $0.5 million draw is then requested and permitted, remaining nominal capacity becomes $0.9 million, before checking any other draw conditions.

Watch the distinction: Subtracting only outstanding loans would show $1.8 million available and overstate capacity by $0.4 million. Count letters of credit when the agreement charges them against the same limit.

Reference: [1]

15. Use physical cash concentration

Physical cash concentration moves funds from participating accounts into a central account, often by a scheduled sweep. This can put one unit's surplus to work against another unit's deficit and reduce simultaneous deposit and overdraft balances. Because cash actually moves, accounting must record the resulting intercompany positions or ownership changes. The sweep also needs permitted accounts, accurate cutoff timing, and a clear way to return funds when subsidiaries need them. Compare the interest and fee benefit with transfer costs and any local restrictions. A balance shown as surplus at one entity may be needed for its next payroll or supplier run, so use a dated local forecast before sweeping it. After the transfer, reconcile both bank movements and intercompany entries to avoid mistaking internal funding for new group cash.

Worked example: Subsidiary A has a usable $200,000 surplus and subsidiary B has a $150,000 deficit. Assuming transfers are permitted and timely, treasury sweeps $200,000 to the center and sends $150,000 to B. The center retains $50,000, while B's deficit is covered. The group avoids $150,000 of external borrowing for that period, though the entities must record the internal transfer.

Watch the distinction: Calling the $200,000 sweep new group liquidity double-counts cash already held by a subsidiary. Concentration changes where cash sits and who owes whom.

Reference: [1]

16. Understand notional pooling

Notional pooling offsets eligible positive and negative account balances for interest calculation under a bank agreement. The bank may calculate interest on a net position, while the account principals remain in their separate accounts. This differs from physical concentration, which transfers money and creates actual movements to reconcile. Eligibility, currencies, legal entities, and the extent of offset depend on the agreement, so test the assumed treatment before modeling savings. A net positive pool does not mean each participant can make a payment without regard to its own account rules or bank credit terms. Treasury should monitor gross balances as well as the net interest position, because a large debit account may still create operational or credit concerns. The main analytical question is what interest benefit the permitted offset produces after fees.

Worked example: Assume two eligible accounts hold +$200,000 and −$150,000 and the bank permits full notional interest offset. The interest calculation uses a net +$50,000 position: $200,000 − $150,000 = $50,000. No $150,000 principal transfer occurs merely because the balances are offset. Treasury must still confirm that the debit account can operate within its agreed terms.

Watch the distinction: Treating a notional pool as a sweep leads to false intercompany cash entries. With interest offset alone, the principals stay in their accounts.

Reference: [1]

17. Choose a payment method by deadline

Select a payment rail by the beneficiary's required receipt time, the rail's settlement characteristics, and the full cost of missing that time. Start with the actual deadline and cutoff, then identify methods that can settle in time. Compare their fees with late charges, lost discounts, service disruption, and any financing effect. A lower transaction fee can produce a much higher total cost if funds arrive too late. Verify the beneficiary instructions through an established channel before releasing an urgent payment; speed increases the cost of an error. Also check whether the recipient can accept the method and whether the account has sufficient available funds at release. Treasury's choice should be documented by the payment need and the operational facts, not by a standing preference for the cheapest rail.

Worked example: A supplier must receive payment today. A same-day wire costs $25 and meets the verified cutoff; a next-day payment costs $2 but triggers a $500 late charge. Total incremental cost is $25 for the wire versus $502 for the next-day method. The wire saves $502 − $25 = $477, assuming both methods otherwise complete successfully and the wire instructions are verified.

Watch the distinction: Choosing the $2 payment because its bank fee is lower ignores the $500 late charge. Compare total consequences at the required receipt time.

Reference: [1]

18. Measure transaction FX exposure

A foreign-currency payable exposes the home-currency cash requirement to exchange-rate changes until settlement or hedging. Express the quote clearly: dollars per euro means multiply euros owed by dollars for each euro. Revalue the same foreign amount under plausible rates, then subtract the initial home-currency estimate to measure sensitivity. The exposure amount and due date help treasury choose an appropriate hedge size and maturity. A stronger euro increases the dollar cost of a euro payable; a weaker euro reduces it. The calculation isolates transaction exposure and does not show the economics of future sales or other offsetting currency flows. Before hedging, net only exposures that can genuinely offset in amount and timing, then check whether the payable is firm or forecast and whether the hedge terms fit it.

Worked example: A company owes €1,000,000 on a specified future date. At $1.10 per euro, the estimated cost is €1,000,000 × $1.10/€ = $1,100,000. If the rate rises to $1.15 per euro, the cost becomes $1,150,000. The $0.05 rate increase raises the dollar payment by $50,000. A full hedge of the firm payable would therefore reference €1,000,000 and its settlement date.

Watch the distinction: Dividing euros by a quote stated in dollars per euro gives the wrong direction and units. Multiply the euro amount by dollars per euro.

Reference: [1]

19. Lock a payable with a forward

A forward contract fixes an exchange rate today for a specified future currency exchange. For a euro payable, treasury can agree to buy the required euros on the payment date at a stated dollar price. Multiplying the euro amount by the forward rate gives the planned dollar outflow, apart from any separately specified costs or mismatches. At settlement, compare that fixed amount with what buying euros at the then-current spot rate would have cost. The difference is an outcome comparison, not a guaranteed gain when the contract is signed. If the euro becomes cheaper, the forward can cost more than remaining unhedged. Match the forward amount and date to the underlying obligation; changes in the payable can leave excess or insufficient coverage. The decision serves cash-flow certainty under a defined exposure.

Worked example: Treasury covers a €1,000,000 payable with a forward to buy euros at $1.12 per euro on the due date. The dollar payment is fixed at $1,120,000. If spot on that date is $1.15 per euro, buying unhedged euros would cost $1,150,000, so the forward saves $30,000 in this scenario. At $1.09 spot, the forward would instead cost $30,000 more.

Watch the distinction: Calling the forward's $30,000 favorable outcome a certain profit ignores the unknown future spot rate. The contract fixes cash cost and also gives up favorable currency moves.

Reference: [1]

20. Follow a letter of credit

A letter of credit is a bank's undertaking to pay a beneficiary when the presentation meets the credit's stated documentary conditions. In a trade transaction, the buyer arranges the credit, the seller ships goods and presents the required documents, and the bank examines those documents against the credit's terms. The bank's payment decision turns on a compliant presentation, rather than its own inspection of the goods. The issuing bank then looks to the buyer for reimbursement under their agreement. Treasury should track the amount, expiry, shipment dates, required documents, and facility capacity consumed. A discrepancy can delay payment or require action allowed by the credit's terms; it does not automatically prove that the shipment itself is defective. In assessing trade credit, distinguish the seller's payment assurance from the buyer's obligation to reimburse the bank.

Worked example: A $200,000 shipment is covered by a letter of credit. The seller presents the specified documents for the full $200,000, and the bank finds them compliant. The issuing bank pays $200,000 under the credit and seeks $200,000 reimbursement from the buyer, subject to their agreement. If a required document is missing, the bank must address that discrepancy under the credit's terms before payment proceeds.

Watch the distinction: Assuming the bank pays because the goods arrived misses the documentary condition. The bank examines the required presentation; shipment performance and document compliance are distinct questions.

Reference: [1]

21. Price an intercompany loan

An intercompany loan moves funding between entities in the same group, but each entity still needs a clear borrower, lender, principal, rate, currency, and repayment date. Start by comparing the borrower's external borrowing cost with the internal interest and any transfer, withholding, or administration costs. Then check whether the lending entity can spare the cash throughout the term. A rate that looks cheap to the borrower may create tax or transfer pricing problems if it cannot be supported under the applicable rules. Currency differences can also shift risk to one entity. Document the arrangement and forecast both entities' cash positions after the transfer. The CTP candidate handbook includes intercompany financing within its corporate liquidity scope.

Worked example: Entity A can lend Entity B $500,000 for 90 days. At 4% simple annual interest using a 365-day year, interest is $500,000 × 0.04 × 90 ÷ 365 = $4,932, rounded. An assumed external rate of 6% costs $7,397 on the same basis. The rounded difference is $2,465. It is a potential group saving only if permitted transfers and related costs preserve it.

Watch the distinction: A lower internal rate does not automatically mean lower group cost. Check the lender's lost investment return, transfer costs, tax treatment, and whether cash remains available when it is needed.

Reference: [1]

22. Plan a cash repatriation

Cash repatriation transfers funds from a subsidiary to another group entity, often the parent. Calculate the amount in stages: identify the subsidiary's cash balance, subtract cash needed for dated local obligations and a reasonable operating reserve, then apply any permitted distribution limit. The smallest resulting amount governs the planned transfer. A positive bank balance alone does not prove that cash is available to move. The method of transfer matters too: a dividend, loan repayment, or other permitted route can have different documentation, tax, currency, and timing consequences. Treasury should align the transfer date with local payroll, supplier payments, and settlement deadlines. Afterward, verify both the sending account's remaining liquidity and the recipient's usable proceeds. This prevents a group-level improvement from creating a local funding problem.

Worked example: A subsidiary holds $800,000 and needs $300,000 for operations. Its cash-based capacity is $800,000 − $300,000 = $500,000. Under the assumed constraints, it may distribute at most $400,000, so treasury plans a $400,000 transfer. The subsidiary retains $400,000, which is $100,000 above its stated operating need. Transfer costs or later outflows would reduce that cushion.

Watch the distinction: Do not treat all cash above the operating need as transferable. A distribution limit may be tighter, and a transfer that clears today can still leave the subsidiary short next week.

Reference: [1]

23. Reconcile cash activity

A reconciliation explains why the bank's recorded balance differs from the company's cash ledger at the same cutoff. First confirm that both balances refer to the same account, currency, and date. Then adjust the bank side for transactions already recorded internally but still clearing: add deposits in transit and subtract outstanding checks or payments. Separately, identify bank-recorded items missing from the ledger, such as charges, interest, or direct debits, and post valid entries to the ledger. The adjusted balances should agree. An unexplained residual is an investigation cue, not an automatic journal entry. Examine transaction identifiers, value dates, reversals, and duplicate postings before deciding whether an error occurred. A matched total can also conceal offsetting errors, so significant aged clearing items deserve review even when the arithmetic balances.

Worked example: At the same cutoff, the ledger shows $750,000 and the bank shows $730,000. The company has recorded $50,000 of deposits that have not cleared and $30,000 of checks the bank has not paid. Adjusted bank cash is $730,000 + $50,000 − $30,000 = $750,000. These identified timing items explain the $20,000 difference; no balancing entry is needed for them.

Watch the distinction: A difference between bank and ledger balances is not itself proof of a bookkeeping error. Confirm clearing items and cutoff dates before posting an adjustment or declaring the reconciliation complete.

Reference: [1]

24. Design a treasury service model

A treasury service model determines which activities staff perform and which a provider performs. Compare full recurring costs, one-time transition costs, service levels, resilience, and control requirements. Outsourcing payment processing may reduce direct staffing expense, yet treasury still owns decisions about authorized users, funding, payment approval, exception resolution, and provider oversight. Map each step from instruction creation to bank confirmation so no control falls between organizations. Service measures should cover timeliness, accuracy, availability, and recovery, with a route for investigating failures. Consider whether the provider can handle expected currencies, volumes, and reporting formats. The decision is stronger when it tests the total cost over the intended contract period and the practical ability to switch providers, rather than relying on a quoted processing fee alone.

Worked example: In-house processing costs $120,000 a year. A provider quotes $80,000 annually, and treasury estimates another $25,000 for oversight and retained controls. The outsourced recurring total is $105,000, yielding $120,000 − $105,000 = $15,000 annual savings. Before choosing it, treasury tests whether payment deadlines, access controls, and exception handling meet its requirements; transition costs would affect first-year savings.

Watch the distinction: The provider's $80,000 quote is not the full outsourcing cost. Add retained work and transition expense, then identify who approves payments and resolves failures after processing moves.

Reference: [1]

Manage capital structure, manage costs of long-term capital and quantitatively evaluate long-term capital resource investments

25. Track the capital mix

Capital mix describes how long-term funding is divided between debt and equity. Calculate a component's share using the same measurement basis for every component: debt divided by debt plus equity, for example. State whether values are book or market values, because those can produce different proportions. New debt raises cash and contractual interest and repayment obligations; new equity can reduce financial pressure but changes ownership. A larger debt share may lower weighted financing cost in some circumstances, yet it also narrows room to absorb weak cash flow and can affect borrowing terms. Assess the mix alongside forecast debt service, covenant capacity, maturity dates, and access to new funds. The calculation shows the financing change; it does not by itself identify an optimal structure for every company.

Worked example: A company starts with $2 million of debt and $3 million of equity, measured on a consistent basis. Debt's share is $2 million ÷ $5 million = 40%. It then issues $1 million of additional debt, with no other change to the stated amounts. Debt becomes $3 million of $6 million, or 50%. The company has more funding and more fixed payment obligations.

Watch the distinction: A higher debt percentage does not establish that financing has become cheaper overall. Interest, covenant limits, refinancing risk, and equity's measured value can change the conclusion.

Reference: [1]

26. Compute a weighted cost of capital

Weighted average cost of capital combines the required returns of a company's long-term funding sources. Multiply each source's target weight by its relevant cost, then sum the products. Debt is commonly expressed after tax when the tax benefit is applicable; equity reflects the return investors require for bearing ownership risk. Weights must sum to 100% and should match the financing mix appropriate to the investment. Use consistent currency, time horizon, and nominal or inflation-adjusted assumptions. WACC can serve as a discount rate for a project whose risk resembles the business represented by those funding costs. A substantially riskier project needs a risk-adjusted assessment rather than automatic use of the company-wide figure. Also keep financing cash flows separate from project operating cash flows to avoid counting financing effects twice.

Worked example: Suppose the target mix is 40% debt and 60% equity. Debt costs 5% after applicable tax effects; equity costs 10%. The weighted cost is (0.40 × 5%) + (0.60 × 10%) = 2% + 6% = 8% per year. An 8% hurdle may suit a project with comparable risk and cash flows stated on the same basis.

Watch the distinction: Do not multiply the full debt rate by the equity weight or add 5% and 10% directly. Each cost contributes only in proportion to its funding weight.

Reference: [1]

27. Read borrowing spreads

A floating-rate loan often prices interest as a reference rate plus a contractual spread. The reference component changes at specified reset dates; the spread compensates the lender for credit and other agreed risks and may also change under the agreement. To estimate interest, add the two rates, multiply by the outstanding principal, and apply the relevant time fraction. State any assumptions about unchanged rates and balances. A spread increase of half a percentage point means an extra 0.005 times principal for a full year, regardless of whether the reference rate also moves. For a borrowing decision, compare fees, rate floors, reset frequency, maturity, collateral terms, and covenant provisions as well as the quoted spread. A narrow spread can still produce costly funding if the other terms are restrictive.

Worked example: A $2 million loan has a 4% reference rate and a 2.5% spread. Assuming both remain constant for a year, its rate is 6.5% and interest is $2 million × 0.065 = $130,000. If the spread rises to 3%, the rate becomes 7% and interest becomes $140,000. The spread change alone adds $10,000 annually.

Watch the distinction: A 0.5 percentage-point spread increase is not a 0.5% increase in the old interest bill. Apply the rate change to outstanding principal over the relevant period.

Reference: [1]

28. Size a lending syndicate

A syndicated loan is funded through commitments from multiple lenders under a coordinated agreement. Start with the required facility size, add confirmed commitments, and calculate the amount still to place. A commitment is a lender's agreed capacity under the facility; it is distinct from the borrower's amount drawn at a particular time. The arranger coordinates allocation, while the agreement sets shared terms such as availability, pricing, repayment, reporting, and lender decisions. If commitments exceed the intended facility, allocations must be adjusted or the borrower must deliberately increase the size. Treasury should also assess each lender's reliability, the maturity profile, and how amendments or waivers are decided. The arithmetic ensures enough capacity; the documentation determines when that capacity can actually be used.

Worked example: A company wants a $100 million syndicated facility. Lender A commits $40 million and lender B commits $35 million, giving $75 million. The arranger must obtain $100 million − $75 million = $25 million more. If another lender offers $30 million, the group must allocate $5 million less than offered or formally enlarge the facility; the borrower does not need $105 million.

Watch the distinction: Do not call total lender commitments cash already borrowed. Interest usually relates to drawings, while undrawn capacity may carry separate fees and remains subject to the agreement's conditions.

Reference: [1]

29. Monitor a leverage covenant

A leverage covenant compares a defined debt amount with a defined earnings measure, often debt divided by EBITDA. Read the agreement's definitions before calculating: it may specify which debt, adjustments, measurement dates, and calculation period count. Divide debt by EBITDA using compatible units, then compare the result with the contractual maximum. Weakening EBITDA raises the ratio even if debt stays flat, so forecast both numerator and denominator. A projected breach calls for action before the test date, such as reducing debt, revising spending, or discussing an amendment with lenders. These responses have costs and cannot be assumed to cure the covenant automatically. The ratio is one view of repayment capacity; for a broader study of lender assessment, see the credit professional study guide.

Worked example: Assume a covenant maximum of 3.5 times debt to EBITDA. With $12 million debt and $4 million EBITDA, the ratio is $12 million ÷ $4 million = 3.0, within the assumed limit. If EBITDA drops to $3 million while debt stays unchanged, the ratio becomes 4.0. At that earnings level, debt would need to be no more than $10.5 million to reach 3.5.

Watch the distinction: A constant debt balance does not guarantee covenant compliance. Earnings can fall and push the ratio above its limit; use the agreement's defined figures and test dates.

Reference: [1]

30. Cost an unused revolver

A revolving credit facility lets a borrower draw, repay, and redraw funds within the agreed limit and availability conditions. Its cost has separate parts. Interest applies to the drawn balance under the loan's pricing terms; a commitment fee may apply to the unused portion because lenders reserve capacity. Calculate unused commitment as the facility limit minus drawings and any other amounts the agreement counts against it. Multiply that balance by the annual fee rate and the fraction of the year it remains unused. A higher draw may reduce the unused fee but increases interest, so compare the combined cost. Also check upfront fees, covenant terms, expiration, and whether the line is committed. Treasury should value the facility's liquidity benefit as well as the expense of keeping it available.

Worked example: A $5 million revolver has $2 million drawn and, by assumption, no other uses. Unused commitment is $5 million − $2 million = $3 million. At a 0.3% annual fee for a full year with unchanged balances, the unused fee is $3 million × 0.003 = $9,000. Interest on the $2 million drawing and any other charges are additional.

Watch the distinction: Do not apply the commitment fee to the full $5 million when the contract charges it on unused capacity. Do not confuse that fee with interest on the drawn balance.

Reference: [1]

31. Calculate debt issue proceeds

A bond's face amount is the principal specified for repayment at maturity, while its issue price determines cash raised before issuance costs. A price quoted as a percentage of face value converts to gross proceeds by multiplication. Subtract underwriting, legal, and other stated issuance fees to find net cash available to the company. Issuing below face value creates a discount: the borrower receives less than the principal it must later repay. Coupon payments, if any, are separate obligations. The economic cost of borrowing therefore cannot be inferred from the coupon alone; it depends on issue proceeds, all future payments, and timing. When comparing financing offers, use consistent net proceeds and cash flow assumptions. The distinction also matters for liquidity planning because the initial funding receipt is smaller than the maturity principal.

Worked example: A bond has $5 million face value and is issued at 98% of face. Gross proceeds are $5 million × 0.98 = $4.9 million. After $50,000 of issuance fees, net proceeds are $4.85 million. Assuming no principal repayment before maturity, the company must still repay $5 million then, plus any separately specified coupon payments during the bond's life.

Watch the distinction: Do not record $5 million as cash received merely because it is the bond's face amount. Issue discount and fees reduce initial proceeds without reducing the stated maturity principal.

Reference: [1]

32. Measure equity dilution

A new share issue changes ownership percentages because the denominator, total shares outstanding, increases. Add newly issued shares to existing shares, then divide each holder's shares by the new total. Existing holders can own the same number of shares but a smaller fraction of the company. That is ownership dilution; it does not alone measure a change in the market value of their holdings. The issue may fund an investment that raises the company's total value, or its pricing and use of proceeds may have other effects. Treasury should distinguish shares newly created by the company from a sale of existing shares between investors, which does not change the total share count. Also consider voting rights and share classes if they differ; a simple share-count percentage assumes identical rights.

Worked example: A company has 4 million identical shares outstanding. It issues 1 million new shares to one investor, bringing the total to 5 million. The investor owns 1 million ÷ 5 million = 20%. Holders of the original 4 million collectively own 4 million ÷ 5 million = 80%, assuming they buy none of the issue. Their collective percentage fell by 20 percentage points.

Watch the distinction: Do not divide the new investor's 1 million shares by the old 4 million shares. Ownership percentages use the total after issuance, and a sale of existing shares has different effects.

Reference: [1]

33. Test a shareholder distribution

A proposed dividend is a cash use that should be tested against the company's near-term obligations and its chosen operating floor. Begin with usable cash, subtract the proposed distribution, and compare the remainder with the minimum. Then extend the forecast through upcoming payroll, debt service, tax, and supplier payments. A balance above the floor immediately after payment can still fall below it before the next receipt arrives. Also check financing agreements, corporate authority, and applicable distribution constraints before treating a dividend as executable. Treasury's role is to show decision makers the timing and funding consequences, including any borrowing needed to maintain operations. If forecasts are uncertain, test a delayed receipt or larger payment. The dividend decision should reflect both shareholder objectives and the company's ability to meet commitments.

Worked example: A company has $2 million of usable cash and an assumed $1.2 million operating minimum. A $500,000 dividend leaves $2 million − $500,000 = $1.5 million, which is $300,000 above the minimum. If a further $400,000 net outflow occurs before new receipts, cash would fall to $1.1 million. The initial headroom therefore does not settle the timing decision.

Watch the distinction: Do not approve a distribution solely because today's post-payment cash exceeds the floor. The dated forecast and any binding restrictions determine whether that cushion survives.

Reference: [1]

34. Estimate portfolio rate sensitivity

Modified duration estimates how a fixed-income portfolio's price responds to a small change in yield. Multiply modified duration by the yield change expressed as a decimal and reverse the sign: when yields rise, price generally falls. Multiply the resulting percentage by current market value for an approximate currency change. Duration reflects the weighted timing of cash flows and the effect of discounting; it is not simply the bond's years to maturity. The estimate assumes the relevant yield shift applies to the valued cash flows and that other influences remain stable. For larger moves, price curvature, often described by convexity, makes the straight-line estimate less accurate. Credit spread changes and embedded options can also alter actual value. Use duration as a sensitivity measure, then examine the portfolio's particular risks.

Worked example: A $1 million bond portfolio has modified duration of 2.5. If its relevant yield rises by one percentage point, use 0.01 for the change. Approximate price change is −2.5 × 0.01 = −0.025, or −2.5%. Applied to $1 million, that is about −$25,000, giving an estimated value near $975,000 before other market effects.

Watch the distinction: Do not treat duration of 2.5 as a guaranteed 2.5% loss for every rate move. The percentage estimate scales with the yield change and weakens for large moves.

Reference: [1]

35. Calculate net present value

Net present value compares an investment's upfront cost with the present value of its future incremental cash flows. Place each cash flow on its actual date, divide a year-end cash flow by one plus the discount rate raised to its year number, and sum the results. Subtract the initial investment. A positive NPV means the forecast cash flows exceed the required return embedded in that rate, under the stated assumptions. Use cash flows the project changes, including relevant operating costs, working capital, and end-of-life proceeds. Avoid counting financing effects twice if the discount rate already reflects financing. Check whether the rate matches the cash flows' currency, inflation basis, and risk. You can use CTP practice questions to rehearse the timing and arithmetic after working through the mechanism.

Worked example: A project costs $100,000 now and returns $60,000 at the end of each of two years. At a 10% annual discount rate, the receipts are worth $60,000 ÷ 1.10 = $54,545.45 and $60,000 ÷ 1.10² = $49,586.78. Total present value is $104,132.23; NPV is $4,132.23. It adds value if these forecasts and the 10% hurdle fit the project's risk.

Watch the distinction: Do not add the two $60,000 receipts and subtract $100,000 to get NPV. Cash received later must first be discounted to the decision date.

Reference: [1]

36. Find a project's internal rate

Internal rate of return is the discount rate that makes a project's NPV equal zero. For one initial outflow and one later inflow, set the future receipt equal to the initial cost compounded at an unknown annual rate for the number of years. Solve for that rate, then compare it with a suitable hurdle. For projects with several cash flows, the rate usually requires iterative calculation. IRR describes a percentage return implied by the forecast cash flow pattern; it does not state the total currency value added. When choosing between projects of different size or timing, compare NPV as well. Unusual cash flow patterns with multiple sign changes can produce more than one IRR, so inspect the sequence before relying on a single percentage.

Worked example: An investment costs $100,000 now and pays $121,000 at the end of year two, with no interim cash flow. Solve $100,000 × (1 + r)² = $121,000. Dividing gives (1 + r)² = 1.21, so 1 + r = 1.10 and r = 10% annually. That exceeds an assumed 9% hurdle, subject to the forecast and project risk.

Watch the distinction: Do not call the $21,000 total gain a 21% annual IRR. It spans two years; compounding converts it to a 10% annual rate.

Reference: [1]

37. Value an acquisition's cash benefit

An acquisition creates value for the buyer only if the benefits acquired exceed the purchase price and the costs needed to realize those benefits. Start with the target's standalone value, add the present value of incremental synergies, then subtract integration costs and the price paid. Use cash flows that the buyer can actually capture. Revenue synergies may need new spending, and cost savings may take time, so timing and probability matter. Avoid double-counting benefits already included in the standalone valuation. The price is a cash outflow to the buyer, while financing the purchase has its own cash and risk consequences. Stress the result with lower synergies or higher integration costs; a small positive estimate can disappear quickly. Treasury helps translate the deal into funding, liquidity, and risk exposures.

Worked example: Assume a target's standalone value is $80 million, additional synergies have a present value of $30 million, integration costs have a present value of $10 million, and the purchase price is $95 million. Net buyer value is $80 million + $30 million − $10 million − $95 million = $5 million. If synergy value falls by $6 million, the estimate becomes −$1 million.

Watch the distinction: Do not compare the $95 million price with $80 million standalone value and stop. Genuine incremental synergies and integration costs both affect the buyer's result, but must be estimated without overlap.

Reference: [1]

38. Fix floating-rate financing

A pay-fixed, receive-floating interest-rate swap can offset the floating interest on a matching loan. The borrower still pays the lender under the loan. Separately, the swap's floating receipts offset the corresponding floating component, while its fixed payments create a more predictable combined cost. Match the swap's notional, reset dates, reference rate, and maturity to the debt before assuming a clean offset. A mismatch leaves basis or timing exposure; fees and any loan spread also remain. If rates fall, the fixed payer generally gives up the benefit of lower floating interest. The swap does not erase the loan or its credit obligations, and the derivative introduces counterparty and valuation considerations. Evaluate it against the company's desired balance between payment certainty and participation in changing rates.

Worked example: A $10 million loan currently costs 6% floating, or about $600,000 for a year if unchanged. Assume a matching swap receives that same 6% and pays 5% fixed on $10 million. Its $600,000 floating receipt offsets its $500,000 fixed payment against the loan's $600,000 interest, leaving about $500,000 combined cost. That is $100,000 less at today's rate, before fees and mismatches.

Watch the distinction: A swap does not change the lender's loan rate to 5% in the contract. It adds separate cash flows whose net effect depends on matching terms and actual rates.

Reference: [1]

Manage internal and external relationships

39. Review a banking relationship

A banking relationship review starts with the services the business must receive: payment deadlines, geographic coverage, reporting, access controls, resilience, and support when transactions fail. Set measurable minimum requirements before comparing price. A cheaper provider that misses a critical service threshold can impose late charges, operational work, or reputational harm greater than its fee saving. Use comparable periods and transaction volumes when reviewing bids, and verify performance data against the agreed definitions. Then compare total cost among providers that satisfy the requirements. A single headline percentage may hide failures on the most time-sensitive payments, so examine exceptions and recovery times too. Treasury can also discuss a remediation plan with an existing bank when performance is close to the requirement, but should measure whether the improvement actually occurs.

Worked example: Bank A costs $90,000 a year and delivers 99% of payments within the agreed time. Bank B costs $70,000 and delivers 95%. Assume treasury requires at least 98% timely delivery on a comparable payment mix. A qualifies; B does not. B's $20,000 annual fee saving cannot justify selecting it under that stated requirement without a verified service improvement.

Watch the distinction: Do not rank banks by annual fees before checking service requirements. The lowest quote may be unusable if its measured delivery misses a deadline the business depends on.

Reference: [1]

40. Analyze bank fees

Bank fee analysis rebuilds a bill from contracted prices and actual service use. Match each billed service code to the agreement, confirm its unit price, and multiply by the month's volume. Add the line totals, then compare with the bank's charges. A difference can arise from an incorrect volume, a changed price, a service outside the agreement, or a period mismatch. Investigate the line item before disputing the whole bill. Distinguish transaction fees from balance-based charges, credits, and one-time items so the comparison uses like terms. Repeated volume changes may also reveal an inefficient payment mix even when every unit price is correct. Treasury should retain the calculation and the bank's response, then update forecasts or recover overcharges as appropriate.

Worked example: An agreement charges $0.12 per electronic payment and $15 per wire. For 10,000 electronic payments, expected cost is 10,000 × $0.12 = $1,200. For 200 wires, it is 200 × $15 = $3,000. Expected total is $4,200. If the bank bills $4,500 for those services and the same period, treasury investigates the $300 difference by line item.

Watch the distinction: A $300 difference is not automatically an overcharge. First verify transaction counts, billing period, service codes, taxes, and any separately agreed charges before requesting a correction.

Reference: [1]

41. Maintain account authority

Maintain account authority. A bank account mandate identifies who may sign or approve transactions for the company. Online banking permissions are a separate control: a person removed from a paper mandate may still have a working login, payment approval role, or security device. Treasury should keep a current inventory of accounts, authorized people, approval limits, and bank systems, then compare it with the company's delegated authority. A departure or role change triggers a request to each affected bank, an access change in each digital channel, and confirmation that both took effect. Record the effective dates and evidence. Where two approvals are required, test that the remaining users can still release legitimate payments without granting one person excessive authority. The CTP Candidate Handbook includes bank account administration and signer management in its relationship domain.

Worked example: An employee leaving today can sign on three accounts and approve payments online. Treasury sends removal instructions to all three banks, disables the online role, and checks each bank's confirmation against the account list. Confirmations arrive for only two accounts. Even though digital access is disabled, one account mandate still names the employee, so treasury follows up and keeps the change open until the third removal is confirmed.

Watch the distinction: Removing a user's treasury workstation login does not automatically revoke a bank mandate. Check bank records and online permissions separately, then retain confirmation for every affected account.

Reference: [1]

42. Compare provider proposals

Compare provider proposals over a common decision period. Start with mandatory requirements such as settlement coverage, security controls, reporting, service hours, and recovery arrangements. Reject a proposal that cannot meet a requirement before treating its low price as a saving. For qualifying bids, calculate implementation charges, recurring fees, expected transaction charges, retained internal work, and likely exit costs over the same period. Distinguish one-time costs from recurring costs, since their effect changes with the contract length. Review assumptions about volumes and growth, and ask what happens if implementation runs late. A service-level promise is useful only if the provider can measure it and treasury can respond to failures. Document both the financial comparison and the operational reasons for the selection; the cheapest first year may have a higher total cost later.

Worked example: Provider A charges $70,000 annually and $30,000 to implement; B charges $85,000 annually and $5,000 to implement. With equal qualifying service, first-year totals are $100,000 for A and $90,000 for B, so B saves $10,000 initially. Over three years, assuming unchanged fees and no other costs, A totals $240,000 and B $260,000. The intended contract term changes the choice.

Watch the distinction: Comparing annual fees alone makes A look $15,000 cheaper. That ignores setup cost and the evaluation period; first-year and multiyear rankings differ in this case.

Reference: [1]

43. Advise on a timing gap

Advise on a timing gap by putting the commercial terms on a dated cash timeline. A profitable sale can still require funding when suppliers are paid before customers settle. Identify each cash outflow, its amount and due date, then map expected receipts using realistic collection dates rather than invoice dates. The largest negative cumulative balance sets the peak funding need; the interval until receipts arrive determines borrowing duration. Add a buffer for plausible delays and confirm whether existing cash is already reserved for other obligations. Show decision makers the cost of a credit line, changes to supplier or customer terms, and the effect on the contract margin. The related management accounting guide can help connect these cash dates with profitability measures, which answer a different question.

Worked example: A contract brings $2 million from the customer on day 60, while its supplier requires $2 million on day 30. With no other cash flows or available cash, the cumulative position falls to negative $2 million on day 30 and returns to zero on day 60. Funding peaks at $2 million for 30 days. At an assumed 6% simple annual rate on a 365-day basis, interest is about $9,863.

Watch the distinction: A contract with matching receipts and payments is not cash neutral on every date. The 30-day interval still needs financing, even if the eventual net cash flow is zero.

Reference: [1]

44. Coordinate a payment change

Coordinate a payment change through a controlled test before moving a new bank service into live use. Treasury defines what a valid payment looks like, including a unique identifier, beneficiary details, amount, currency, and status response. IT maps those fields between systems; accounting checks that the payment register, bank acknowledgments, and ledger agree. Legal reviews any change to agreements or data handling, while audit can assess whether approval evidence and exception logs remain available. When a defect appears, stop the affected release, trace it to the source field, correct the mapping, and rerun a representative file. Reconciliation should prove that every authorized payment appears once and that rejected items are visible. A successful transmission alone does not establish that payments settled correctly or only once.

Worked example: A test file contains 100 authorized payments. Two records share an identifier that the bank treats as unique, so one may be rejected or confused with the other. Treasury holds launch, IT assigns distinct identifiers, and accounting reconciles the retest. Release requires 100 distinct accepted records, 100 matching amounts and beneficiaries, and no duplicate settlement. Any missing record remains an unresolved exception.

Watch the distinction: A bank acknowledgment for the file does not prove that all 100 payments were accepted. Inspect record-level responses and reconcile each item before declaring the change ready.

Reference: [1]

Monitor and control corporate exposure to financial, regulatory and operational risk .(including emerging and reputational risk).

45. Quantify a control decision

Quantify a control decision using expected loss, then test the assumptions behind it. Expected loss is the estimated probability of an event multiplied by its financial impact over a stated period. A control has value if it reduces the chance, the severity, or both. Compare the reduction in expected loss with the control's full cost over the same period. This is a planning estimate, not a guarantee: rare events, uncertain probabilities, correlated failures, and severe reputational effects can make an average misleading. Ask how the probability was estimated, whether the control will actually operate, and whether the company can tolerate the remaining worst-case loss. Controls that protect payment integrity or meet binding obligations may be necessary even when the simple expected-value calculation looks weak. Reassess the estimate after incidents or process changes.

Worked example: Assume a $1 million loss has a 20% annual probability, so expected annual loss is $200,000. A control costing $50,000 per year lowers the estimated probability to 5%, leaving $50,000 of expected loss. The estimated annual benefit net of control cost is $200,000 minus $50,000 minus $50,000, or $100,000. The possible $1 million event still warrants attention.

Watch the distinction: A positive expected net benefit does not mean the control eliminates risk. The residual probability and potential full loss remain relevant to the decision.

Reference: [1]

46. Measure interest-rate exposure

Measure interest-rate exposure by matching the debt balance, reset terms, and time horizon. For a simple floating-rate loan, approximate extra interest as exposed principal multiplied by the rate change and the fraction of a year affected. A one-percentage-point move is 0.01, not 1. The estimate assumes the balance and rate difference persist; amortization, rate floors, caps, and different reset dates change the result. Map each borrowing to its reference rate and reset date, then identify any offset from floating-rate assets or derivatives. A hedge covering only part of the debt reduces sensitivity proportionally if its notional and reset basis match. Report both the unhedged cash-flow effect and the cost or constraints of the hedge so management can judge budget risk against flexibility.

Worked example: Suppose $10 million of floating debt remains outstanding for one full year and its rate rises from 5% to 6%. Extra interest is $10 million × 0.01 = $100,000. A matching hedge on $5 million fixes the rate on half, leaving $5 million exposed. Its approximate extra interest becomes $5 million × 0.01 = $50,000, before hedge costs or basis differences.

Watch the distinction: Do not apply a one-percentage-point increase as a 1% change in the interest bill. It is an additional 1% of exposed principal for the affected period.

Reference: [1]

47. Assess an FX hedge outcome

Assess an FX hedge against the exposure it was meant to protect. A foreign-currency receivable creates uncertainty in the home-currency amount collected. Selling the expected currency forward fixes an exchange rate for a specified amount and settlement date, subject to counterparty performance and contract terms. Compare the fixed proceeds with what spot conversion would have produced at settlement to measure the outcome. Then evaluate the decision separately: a sound policy may give up upside when rates move favorably, because its purpose was to protect a budget or margin. Match hedge notional to the likely receivable and consider what happens if the customer pays late or less than expected. An overhedge can leave a currency position rather than offsetting one. State quote direction clearly, such as dollars per euro, before calculating.

Worked example: A company expects €1 million and sells it forward for $1.10 per euro, fixing $1.10 million. At settlement spot of $1.05, an unhedged conversion would yield $1.05 million; the forward adds $50,000 in this outcome. At $1.15 spot, unhedged proceeds would be $1.15 million, so the forward gives up $50,000. Both comparisons assume full collection on the contracted date.

Watch the distinction: Calling a hedge good only when it beats settlement spot confuses outcome with purpose. Judge whether its amount and date matched the exposure and its agreed risk objective.

Reference: [1]

48. Control commodity price exposure

Control commodity price exposure by identifying how a market move changes a planned purchase. Start with physical quantity, purchase date, and the price in the operating budget. Multiplying quantity by a possible market price gives an unhedged cost scenario. A fixed-price hedge can make the combined effective price more predictable, but its result depends on matching the commodity grade, location, quantity, and delivery period. Those differences create basis risk. A futures or swap position may also produce cash settlements or margin calls before the physical purchase, so a price hedge can create a liquidity need. Compare the hedged cost with both the budget and the unhedged scenario, including fees and any known basis adjustment. Treasury should coordinate with procurement because operational changes in required quantity can leave an unmatched hedge.

Worked example: The company needs 100,000 barrels. At the $80-per-barrel budget, cost is $8 million. If the future market price is $90, buying unhedged costs $9 million, a $1 million overrun. A fully matching $82-per-barrel hedge implies about $8.2 million, or $200,000 above budget and $800,000 below the unhedged scenario, before fees, margin funding, and basis effects.

Watch the distinction: A hedge at $82 does not preserve the $80 budget. It limits the assumed price to about $82 per barrel, leaving a $200,000 budget overrun on 100,000 barrels.

Reference: [1]

49. Limit counterparty concentration

Limit counterparty concentration by measuring exposure to each financial institution against a defined internal limit. Deposits, investments, derivative receivables, and unused but relevant credit arrangements may need different measures; a simple deposit balance is only one exposure type. First establish which legal entity bears the claim, then aggregate balances that the limit treats as connected. Compare the result with approved capacity and plan transfers early enough to settle before a breach persists. Moving money reduces concentration only if the receiving bank is approved, has room under its own limit, and provides the required liquidity. Consider currency, account access, and deposit maturity before reallocating. Limits are a control on loss severity, not proof that an institution is safe. Monitor temporary peaks around payroll, collections, and debt issuance as well as end-of-day balances.

Worked example: Treasury holds $2 million at Bank A, while its assumed internal deposit limit is $1 million per bank. Bank B is approved and has at least $1 million of spare limit. Moving $1 million to B leaves $1 million at each bank and removes A's $1 million excess. Treasury confirms the transfer settled and checks both resulting balances against the limit.

Watch the distinction: Opening a second account at Bank A does not necessarily diversify exposure. If the limit applies to the bank counterparty, both account balances still count together.

Reference: [1]

50. Prepare contingency funding

Prepare contingency funding from a dated stress forecast, not just a list of possible lenders. Identify the cash outflow at each date, subtract cash that is genuinely available, and add committed credit that can be drawn in time and in the needed currency. Check conditions, collateral, covenants, and operational draw procedures before counting a facility as usable. The largest remaining negative balance is the residual gap requiring an action with a named owner and trigger. Options may include drawing another committed line, accelerating collectible receipts, or deferring spending that is genuinely discretionary. Test the timing of each action against payment cutoffs; funding that arrives the next day cannot cure today's shortfall. Use CTP practice questions to rehearse the arithmetic, then ask which assumptions about availability could fail together under stress.

Worked example: A stress scenario brings $4 million of near-term outflows. Usable cash is $1.5 million, and a committed facility can provide $2 million before the due date. The uncovered amount is $4 million minus $1.5 million minus $2 million = $500,000. Treasury must arrange another timely source or defer at least $500,000 of eligible payments; merely having a future credit approval does not close today's gap.

Watch the distinction: A facility's headline limit is not the same as cash available on the payment date. Count only undrawn capacity that satisfies its conditions and can be accessed in time.

Reference: [1]

51. Separate payment duties

Separate payment duties so one person cannot both create a payment and authorize its release. Creation includes entering the amount, beneficiary, bank details, and payment date. Approval should be performed by someone with independent authority who can compare those fields with a valid invoice or instruction. The system must enforce distinct users, not merely display two approval buttons. Limit access by role, review entitlements when staff move, and retain an audit trail showing who entered, changed, approved, and transmitted the item. If a small team needs an emergency process, define an independent compensating review and record its use. Segregation does not replace beneficiary verification: two people can approve the wrong account if both rely on the same compromised message. Reconcile released payments to bank activity to catch exceptions after transmission.

Worked example: An operator enters a $300,000 supplier payment and still has approval rights. The system holds it because the creator cannot approve the same item. An authorized colleague checks the invoice, beneficiary record, amount, and due date, then approves. The bank release log shows two distinct users and one $300,000 payment. If the colleague finds a changed account number, the payment remains on hold for verification.

Watch the distinction: Two clicks by the same user are not two independent controls. The reviewer must be a different authorized person with enough information to challenge the payment details.

Reference: [1]

52. Verify a changed beneficiary

Verify a changed beneficiary through a channel independent of the change request. A convincing email can be sent from a compromised supplier account or imitate a familiar address, so replying to it does not establish authenticity. Pause the change, retrieve the supplier's previously verified phone number or another trusted contact method, and confirm the new bank details with an authorized contact. Record who was reached, when, and what was confirmed. A second internal review can check that the verified details were entered correctly before the next payment. If verification fails, keep the original approved instructions and investigate the attempted change. Pay attention to urgency, secrecy, or a request to bypass normal contacts, but treat these as cues rather than proof. The control protects both the supplier relationship and company cash.

Worked example: An email asks treasury to send a $250,000 invoice payment to a new account today. Treasury calls the supplier using the number already held in its verified vendor record. The supplier confirms it requested no change. Treasury rejects the new account, alerts the relevant teams, and releases the $250,000 only to the previously verified account if the invoice and other approvals are valid.

Watch the distinction: Replying to the request email or calling a number included in it is not independent verification. Both may be controlled by the attacker.

Reference: [1]

53. Close cyber access gaps

Close cyber access gaps by removing privileges and examining what happened while they were exposed. Treasury systems can grant payment creation, approval, administrator, bank connectivity, or credential-management rights. An administrator account deserves particular attention because it may change other users' access or payment settings. When a person leaves or changes role, disable their named accounts, revoke tokens and bank-channel access, and rotate any shared credentials they knew. Compare system and bank logs with the person's departure date, then investigate unusual access, beneficiary changes, and payments. Document the scope and result of the review. Shared accounts make attribution difficult, so replace them with named access where practical. The goal is to stop further use and determine whether earlier actions require correction, recovery, or notification through the company's incident process.

Worked example: A former employee still has administrator rights in a treasury workstation two days after departure. Treasury disables the account, revokes its active sessions, and changes a shared service password the person knew. It reviews logs for those two days, including user-role changes and payment activity. Finding no unexplained changes closes the immediate investigation, while the delayed removal is recorded for process correction.

Watch the distinction: Disabling the former employee's login addresses future access but does not explain activity during the gap. Review the relevant logs and shared credentials before closing the incident.

Reference: [1]

54. Escalate a screening match

Escalate a screening match without treating a shared name as a final finding. A payment screen may compare names against restricted-party lists and flag a possible match. Treasury should hold the payment while the appropriate specialist compares reliable identifiers, such as location, entity details, ownership information, and other data available for the transaction. A false positive can be cleared with documented reasoning; a credible match requires the response specified by applicable rules and company procedures. Do not alter spelling or split the payment to bypass screening. Keep the original instruction, screen result, review evidence, and final disposition so the decision can be traced. Because requirements differ by jurisdiction and transaction, treasury's operational role is to preserve the hold and provide accurate facts for the authorized review, then release or reject only after resolution.

Worked example: A supplier payment flags because its beneficiary has the same name as a listed party. Treasury holds the transfer and sends the supplier's verified address, legal entity details, and transaction documents for review. The reviewer finds that the listed party has different identifying details and documents a false positive. Only then does treasury release the original payment. If the identifiers instead align, the payment remains held for the required disposition.

Watch the distinction: A name match alone does not establish that the beneficiary is restricted, but it is enough to pause release. Skipping the review risks an unsupported decision.

Reference: [1]

55. Challenge an automated forecast

Challenge an automated forecast with known cash commitments before using it to fund accounts. Forecasting software may miss payments because a file was excluded, a field was mapped incorrectly, or a cutoff date shifted. Compare forecasted disbursements with approved payment files and other reliable obligations by date and currency. Quantify any difference in both amount and effect on minimum cash. Trace a material error to its source, correct the immediate cash position, and then fix the model or interface that produced it. Test the revised output against a fresh period so the correction is more than a manual override. Track errors by cause; repeated omission of one payment type signals a systematic weakness. Automation can process more data quickly, but accountable treasury staff still decide whether the output is complete enough for a funding decision.

Worked example: Approved payments due this week total $5 million. A new tool forecasts only $4 million, understating them by $1 million, or 20% of the approved total. Treasury raises the funding plan by $1 million, compares individual payment identifiers with the model feed, and finds an omitted file. After repairing the feed, a rerun must include all $5 million on the correct dates before the forecast is relied on.

Watch the distinction: A forecast that looked accurate last month may still omit a new payment stream. Validate current output against known commitments before drawing or investing cash.

Reference: [1]

56. Recognize reputational consequences

Recognize reputational consequences when a treasury incident affects people who depend on timely payment. A payroll failure has a direct cash component and can also harm employee trust, create hardship, and demand coordinated communication. First confirm the exact amount, account balance, funding deadline, and payment status; a booked transfer is not the same as settled payroll. Activate a tested source of cash and verify the bank can process it before cutoff. Coordinate with payroll, human resources, and communications so affected employees receive accurate information if delay becomes likely. After settlement, investigate why the shortfall was missed, including forecast errors, account funding rules, and backup arrangements. Prioritize incidents by who is affected and how quickly harm occurs, not solely by the dollar amount. Record the steps taken and final settlement evidence.

Worked example: Today's payroll file requires $1 million, but its payment account has $900,000. The immediate shortfall is $100,000. Treasury moves $100,000 from a verified backup account before the bank cutoff, confirms the receiving balance is $1 million, and checks that the full payroll file settles. It alerts payroll and human resources to the resolved issue and investigates the funding forecast that missed the gap.

Watch the distinction: Treating the $100,000 as a small funding issue misses the potential effect on employees. Confirm settlement and coordinate accurate communication as well as moving the cash.

Reference: [1]

57. Test operational recovery

Test operational recovery against the business deadline a service must meet. A recovery time is useful only in relation to the next critical cutoff, the time to prepare transactions, and the time the bank needs to accept them. For each essential payment process, identify the failure point, expected restoration time, alternate channel, authorized users, and data needed to operate it. Test the alternate with realistic files or instructions, including approval and reconciliation, rather than assuming that access alone is enough. If the primary system cannot be restored before cutoff, invoke the alternate early enough for its own setup and transmission. After the event, update the recovery plan with the measured times and any dependencies that failed. A recovery objective can be met technically while the business still misses a payment deadline.

Worked example: A critical payment cutoff is two hours away. The backup system needs four hours to restore, so it will miss the deadline by two hours. A tested alternate channel takes one hour to prepare and transmit. Treasury uses that channel now, preserves the required approvals, and confirms bank acceptance before cutoff. The plan is revised because the four-hour backup is inadequate for this payment.

Watch the distinction: A backup system is not sufficient simply because it eventually restores service. Compare its actual recovery time with the payment's remaining cutoff time, including preparation and bank acceptance.

Reference: [1]

58. Validate a new bank service

Validate a new bank service with record-level and value-level reconciliation. A test should cover normal payments, rejects, duplicate identifiers, changed beneficiaries, status messages, and return files. Compare the total authorized value and count with what the bank accepts, rejects, and settles. A rejection percentage by value identifies money left unpaid; a rejection percentage by count answers a different question. Trace each failed record to its source field or rule, correct the file mapping or data, and rerun the full process. Set a release condition that all expected items have a known final status and no unauthorized or duplicate item is paid. Include the downstream ledger feed, because a bank can settle correctly while accounting records remain wrong. Keep evidence of tests, fixes, approvals, and the first live reconciliation.

Worked example: A test file totals $2 million. The bank rejects 1% of its value, so $2 million × 0.01 = $20,000 remains unprocessed and $1.98 million is accepted. Treasury identifies the rejected records, corrects an invalid field mapping, and reruns the complete file. Launch waits until the full $2 million has the expected acceptance status, with no duplicate payment and a matching accounting record.

Watch the distinction: A 1% value rejection rate does not mean 1% of payment records failed. Count and value must be reconciled separately to find every unpaid item.

Reference: [1]

59. Protect treasury data integrity

Protect treasury data integrity as instructions move between systems. A payment can be authorized once but transmitted twice if an interface retries after a timeout without recognizing that the first message succeeded. Give each business transaction a stable unique key that survives retries, and make the receiving process detect repeats before release. Compare source, interface, bank, and ledger records by key, amount, beneficiary, and status. An apparent duplicate may be a legitimate second installment, so investigate before deleting records; preserve the audit trail and the original authorization. Controls should also catch altered amounts and missing records, not just repeats. Design retry behavior to query the prior status when uncertain. Reconciliation after bank response confirms whether the intended single payment actually settled, preventing both duplicate loss and an unpaid obligation.

Worked example: An approved $40,000 payment is sent twice after an interface retry. The receiving system initially displays two $40,000 records, totaling $80,000. Both carry the same transaction key, so the duplicate check holds the second record. Treasury confirms the first record's bank status and releases only one $40,000 payment. The exception log retains the retry and its resolution for investigation.

Watch the distinction: Matching only amount and beneficiary can wrongly block two legitimate payments. A stable transaction key, authorization record, and status check distinguish a retry from a separate obligation.

Reference: [1]

60. Monitor control exceptions

Monitor control exceptions by turning a rate into an investigation. Define the population and evidence required before measuring failures; otherwise the percentage can hide missing records or inconsistent review. Calculate exceptions divided by all relevant transactions over the same period, then compare the result with an explicitly stated internal tolerance. Investigate individual cases first when the control protects a high-risk step such as beneficiary changes. Determine whether evidence was never collected, was stored elsewhere, or shows that the check was skipped. Resolve affected transactions before release where possible, identify the process cause, and assign a corrective action with an owner and date. Track the next period to see whether the fix worked. A low average exception rate can still contain one material unauthorized change, so the rate informs prioritization but does not replace case review.

Worked example: Of 200 beneficiary changes, six lack documented callbacks. The exception rate is 6 ÷ 200 = 3%. Against a hypothetical internal tolerance of 1%, the rate exceeds tolerance by two percentage points; at most two exceptions would fit that tolerance for 200 changes. Treasury holds affected pending payments, checks all six changes through verified contacts, and fixes the workflow that allowed missing evidence.

Watch the distinction: A 3% exception rate does not prove six fraudulent changes, but neither can those cases be ignored. Establish what happened in each one before payment.

Reference: [1]

Official references and further reading

All study guides

Maintain corporate liquidity required to meet current and future obligations in a timely and cost effective manner

1. Set the daily cash position

2. Distinguish bank and book balances

3. Read liquidity ratios together

4. Build a dated cash forecast

5. Explain forecast variance

6. Stress a liquidity forecast

7. Calculate the cash conversion cycle

8. Value faster collections

9. Evaluate supplier discounts

10. Measure inventory's cash demand

11. Compare short-term investment yields

12. Ladder investment maturities

13. Find the full cost of short-term borrowing

14. Calculate available facility capacity

15. Use physical cash concentration

16. Understand notional pooling

17. Choose a payment method by deadline

18. Measure transaction FX exposure

19. Lock a payable with a forward

20. Follow a letter of credit

21. Price an intercompany loan

22. Plan a cash repatriation

23. Reconcile cash activity

24. Design a treasury service model

Manage capital structure, manage costs of long-term capital and quantitatively evaluate long-term capital resource investments

25. Track the capital mix

26. Compute a weighted cost of capital

27. Read borrowing spreads

28. Size a lending syndicate

29. Monitor a leverage covenant

30. Cost an unused revolver

31. Calculate debt issue proceeds

32. Measure equity dilution

33. Test a shareholder distribution

34. Estimate portfolio rate sensitivity

35. Calculate net present value

36. Find a project's internal rate

37. Value an acquisition's cash benefit

38. Fix floating-rate financing

Manage internal and external relationships

39. Review a banking relationship

40. Analyze bank fees

41. Maintain account authority

42. Compare provider proposals

43. Advise on a timing gap

44. Coordinate a payment change

Monitor and control corporate exposure to financial, regulatory and operational risk .(including emerging and reputational risk).

45. Quantify a control decision

46. Measure interest-rate exposure

47. Assess an FX hedge outcome

48. Control commodity price exposure

49. Limit counterparty concentration

50. Prepare contingency funding

51. Separate payment duties

52. Verify a changed beneficiary

53. Close cyber access gaps

54. Escalate a screening match

55. Challenge an automated forecast

56. Recognize reputational consequences

57. Test operational recovery

58. Validate a new bank service

59. Protect treasury data integrity

60. Monitor control exceptions

Official references and further reading

Frequently Asked Questions

Related Study Guides

Certified Treasury Professional (Canada)

Association of Chartered Certified Accountants Qualification (ACCA)

Certified Anti-Money Laundering Specialist (CAMS)