Free CISI CWM AWM Practice Questions: Liquidity and Cash-Flow Management

CISI means Chartered Institute for Securities & Investment. CWM means Chartered Wealth Manager, and this page is for the Applied Wealth Management paper. Use this focused CISI CWM Applied Wealth page as a short practice test for Liquidity and Cash-Flow Management. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

Topic snapshot

Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A wealth manager is reviewing cash holdings for a retired client who wants planned spending to be met without forced sales from the investment portfolio.

For this planning exercise, the initial cash reservoir is defined as:

• six months of core household expenditure;
• the forecast net income shortfall for the next 24 months; and
• known liabilities due within 24 months.

Which objective should the long-term cash management programme set?

• A. Maintain about £143,600 in accessible cash or near-cash for the reserve, shortfall and known liabilities, then review the remaining £56,400 for longer-term planning.
• B. Earmark £71,000 for known liabilities and treat the remaining £129,000 as surplus because regular income is secure.
• C. Retain only £36,600 in accessible cash for emergencies and move the remaining £163,400 immediately into the investment portfolio.
• D. Hold the full £200,000 in instant-access cash because all planned liabilities fall within the next two years.

Best answer: A

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: A long-term cash management programme should ensure cash is available when private-client liabilities arise, while avoiding an excessive permanent cash holding. It should cover emergency liquidity, expected income shortfalls and known calls on capital, then consider whether any excess is better used for investment, debt reduction, gifts or other planning aims. Here, the emergency reserve is 6 × £6,100 = £36,600. The monthly shortfall is £6,100 - £4,600 = £1,500, so the 24-month shortfall is £36,000. Known liabilities total £16,000 + £24,000 + £31,000 = £71,000. The initial reservoir is therefore £143,600, leaving £56,400 of the £200,000 to be reviewed under suitability, time horizon, risk and tax considerations.

• Retaining only the emergency reserve ignores the forecast monthly deficit and planned capital calls.
• Holding the full balance in instant-access cash may create cash drag and inflation risk once the quantified liquidity need is covered.
• Funding only known liabilities overlooks both the household income shortfall and the agreed contingency reserve.

The required reservoir is £36,600 emergency reserve, plus £36,000 forecast shortfall, plus £71,000 known liabilities, leaving £56,400 for other objectives.

Question 2

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A recently retired client has a £420,000 portfolio and wants to reduce the risk of being forced to sell growth assets during a market fall.

Current portfolio:

Liabilities and planning assumptions:

• Essential expenditure is £5,000 per month.
• The agreed emergency reserve is six months of essential expenditure.
• A tax payment of £24,000 is due in four months.
• School fees of £54,000 are due over the next 24 months.
• Other goals are more than five years away.

Which restructuring best matches the role of cash, short-duration assets, and investment assets?

• A. Hold £30,000 in cash, £104,000 in short-duration assets, and £286,000 in investment assets.
• B. Hold £54,000 in cash, £54,000 in short-duration assets, and £312,000 in investment assets.
• C. Leave £20,000 in cash, £80,000 in short-duration assets, and £320,000 in investment assets.
• D. Hold £108,000 in cash and leave the remaining £312,000 in investment assets.

Best answer: B

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: Cash is most suitable for immediate access needs and contingencies, not for all future liabilities. The emergency reserve is six months of essential spending: 6 × £5,000 = £30,000. Adding the £24,000 tax payment due in four months gives a cash target of £54,000. The £54,000 school-fee liability falls within the next 24 months, so it should be matched with short-duration, lower-volatility assets rather than exposed to equity-market timing risk. Longer-term objectives can remain in the diversified investment portfolio, accepting volatility in exchange for expected real growth. The current portfolio would therefore move £34,000 into cash and retain or top up short-duration assets to £54,000, leaving £312,000 invested for longer-term goals.

• Holding only £30,000 in cash ignores the tax payment due in four months.
• Holding £108,000 entirely in cash overuses cash for the 24-month school-fee liability and may create unnecessary inflation drag.
• Leaving the portfolio unchanged leaves the client short of the agreed cash reserve plus the imminent tax payment.
• Short-duration assets are appropriate for known near-term liabilities, while investment assets are better reserved for longer horizons.

Cash covers the £30,000 reserve plus the £24,000 near-term tax payment, while short-duration assets match the two-year school-fee liability.

Question 3

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A wealth manager is preparing the retirement allocation for a client who wants to avoid selling growth assets during a market downturn.

Client extract:

• Client: Helen, age 62, recently widowed, retiring in six months.
• Family: No financial dependants, but she has promised a fixed gift toward her granddaughter’s university costs.
• Income and spending:
  • Target net spending in retirement: £72,000 a year.
  • Secure pension income from retirement: £38,000 a year.
• Portfolio: £1,150,000 in a balanced discretionary portfolio.
• Risk profile: Medium, but with low tolerance for forced sales in the first few years of retirement.
• Existing cash: £45,000 emergency cash is to be kept separately.
• Known one-off spending: £25,000 home adaptation in 18 months and £15,000 education gift in 30 months.

The firm’s planning approach is to hold an investment reservoir equal to three years of expected net withdrawals from the portfolio, plus known one-off spending due within that three-year period. Emergency cash held separately is not included.

What size investment reservoir should Helen hold?

• A. £216,000
• B. £187,000
• C. £142,000
• D. £102,000

Best answer: C

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: The reservoir should be sized around the cash flows the portfolio must fund over the relevant near-term period. Helen’s annual spending need is £72,000, but £38,000 is covered by secure pension income, so the expected annual withdrawal from the portfolio is £34,000. Three years of portfolio withdrawals therefore require £102,000. The known home adaptation and education gift are both due within the three-year reservoir period, so a further £40,000 should be added. The separately maintained £45,000 emergency cash should not be double counted because the firm’s approach excludes it from the investment reservoir. The appropriate reservoir is therefore £142,000.

• £102,000 covers only the recurring portfolio withdrawals and omits the scheduled one-off spending.
• £187,000 double counts the emergency cash that is being retained separately.
• £216,000 uses three years of gross spending and ignores the secure pension income.

It covers three years of the £34,000 annual portfolio withdrawal need plus £40,000 of scheduled spending within that period.

Question 4

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Dr and Mrs Evans are reviewing £150,000 currently held in instant-access cash. The cash deposit is expected to return 3.5% a year. A suitable long-term balanced portfolio is expected to return 6.5% a year, but could fall in value over one to three years.

They do not expect to need any surplus invested money for at least five years. The emergency reserve is to be kept separate from known spending needs.

Which recommendation best balances liquidity and expected return?

• A. Hold £88,000 in cash and move £62,000 to the long-term portfolio, giving an expected return uplift of about £1,860 a year on the amount moved.
• B. Hold £64,000 in cash and invest £86,000, because the known repair and monthly shortfall are the only near-term liabilities.
• C. Hold all £150,000 in cash, because the planned withdrawals and emergency reserve make volatility inappropriate for the whole balance.
• D. Hold £24,000 in cash and invest £126,000, because six months’ essential expenditure is the full liquidity requirement.

Best answer: A

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: Liquidity planning should first cover committed or likely short-term calls on cash, including a separate emergency reserve. The emergency reserve is 6 × £4,000 = £24,000. Known short-term needs are £3,000 × 12 = £36,000 plus £28,000 for repairs. The required liquid reservoir is therefore £88,000. The remaining £62,000 has no near-term call and may be allocated to suitable long-term investments if the clients’ risk profile and capacity for loss support it. The expected return difference is 6.5% - 3.5% = 3.0%, so moving £62,000 gives an expected extra return of about £1,860 a year before tax and costs.

• Keeping the full £150,000 in cash overfunds the reservoir and ignores the opportunity cost of surplus long-term money.
• Holding only £24,000 treats the emergency reserve as the whole requirement and leaves no cash for the known deficit or repair.
• Holding £64,000 covers planned spending but fails to maintain the separate emergency reserve.

The liquid reservoir is £24,000 emergency cash plus £36,000 of known shortfall plus £28,000 for the repair, leaving £62,000 available for longer-term investment.

Question 5

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

At an annual review, a wealth manager is preparing a short note for Ms Wilson explaining why cash is being retained rather than fully invested.

Client facts:

• She has a £950,000 balanced investment portfolio for long-term growth.
• She also holds £120,000 cash from a property sale and is concerned that deposit rates are low.
• Planned spending is £35,000 school fees in 3 months, £40,000 home works in 10 months, and an £18,000 tax payment in January.
• Her self-employed income is variable, and an emergency reserve of £25,000 has been agreed.

“I understand the figures, but I need to know what the cash is for.”

Which wording would best explain the liquidity recommendation?

• A. Invest the £120,000 now into the balanced portfolio because her objective is long-term growth and low deposit rates reduce real value.
• B. Retain about £118,000 in instant-access and short-notice cash for the school fees, works, tax and emergency reserve; invest only any surplus, so planned bills do not depend on selling the portfolio at a poor time.
• C. Hold the full £120,000 in cash indefinitely until investment markets have been stable for a sustained period.
• D. Keep only the £25,000 emergency reserve in cash and fund each known payment from the portfolio when the invoice or tax demand arrives.

Best answer: B

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: A liquidity recommendation should translate portfolio advice into the client’s spending timetable. Here, the known short-term outflows are £35,000, £40,000 and £18,000, plus the agreed £25,000 emergency reserve, totalling about £118,000. Keeping that amount in accessible or near-accessible cash allows Ms Wilson to meet planned bills without relying on market conditions, credit, or forced sales from her balanced portfolio. The explanation is also client-centred: it does not merely state a cash amount, but connects each part of the reserve to a purpose she recognises. Any surplus can then be considered for investment in line with her long-term growth objective and risk profile.

• Investing all the cash ignores known near-term payments and exposes them to market timing risk.
• Keeping only the emergency reserve treats planned school fees, home works and tax as if they were uncertain portfolio withdrawals.
• Holding cash indefinitely frames liquidity as a reaction to market volatility rather than a planned match to spending needs.

This links the cash recommendation directly to specific known spending and the agreed emergency reserve.

Question 6

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A 62-year-old client has recently sold a business and is reviewing how to fund planned spending.

Decisive facts:

• £40,000 is due to a builder in 2 months and £80,000 is due in 10 months.
• She holds £250,000 in cash from the sale and a separate 60/40 investment portfolio intended to support retirement over 10+ years.
• She says, “I do not want to risk not having the money when the invoices are due, and I do not want to borrow.”
• She is comfortable earning only a modest return on money needed for the works.

Which funding approach is most suitable?

• A. Crystallise pension benefits now and use the pension commencement lump sum to fund the works, leaving the cash invested for growth.
• B. Invest £120,000 in a cautious multi-asset fund and sell units shortly before each invoice date to improve the expected return.
• C. Use a portfolio-backed loan to pay the invoices and repay the borrowing later from the retirement portfolio if markets perform well.
• D. Ring-fence £120,000 from the sale proceeds, keeping the first payment in instant-access cash and placing the second in a low-risk cash deposit or similar instrument maturing before it is needed.

Best answer: D

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: Known short-term liabilities should normally be funded from assets that are highly liquid and have low capital volatility. The client has both the means and the preference to avoid borrowing, and the payments are due within 10 months. The most suitable approach is therefore to separate the required £120,000 from the long-term retirement portfolio and align the cash holdings with the invoice dates. This preserves the retirement portfolio’s longer time horizon while reducing the risk that market movements or settlement timing could prevent payment. Seeking extra return is less important than certainty of access for committed near-term spending.

• A cautious multi-asset fund can still fall in value over a short period, so it is not a good match for fixed payments due within months.
• Portfolio-backed borrowing conflicts with the client’s stated preference not to borrow and introduces interest-rate and collateral risks.
• Using pension benefits is unnecessary when suitable cash is already available and could disrupt the retirement-income strategy.

This matches the known payment dates, protects capital for the short-term liability, and respects the client’s wish not to borrow.

Question 7

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A wealth manager is reviewing how much cash a client couple should retain after a business sale.

Client extract:

• David and Amira, both 49, have two children and no mortgage.
• Net household earned income covers normal living costs, but not the one-off items below.
• Existing diversified portfolio: £1,600,000, invested for long-term growth and income.
• New sale proceeds held in instant-access cash: £900,000.
• Risk profile: medium; capacity for loss is good for long-term assets, but they do not want to risk capital needed within 12 months.
• Near-term calls on cash:
  • £250,000 renovation payment due in 5 months.
  • £80,000 tax payment due in 7 months.
  • £45,000 school-fee payment due in 9 months.
  • £100,000 emergency reserve agreed as appropriate.

Which recommendation best balances liquidity needs with the pursuit of higher expected return?

• A. Retain about £475,000 in cash or short-term deposits for the known liabilities and emergency reserve, and invest the remaining surplus in line with the agreed medium-risk long-term strategy.
• B. Retain only the £100,000 emergency reserve in cash and invest the rest immediately because the clients have good capacity for loss.
• C. Invest the full £900,000 and meet the 12-month liabilities by borrowing secured against the portfolio if needed.
• D. Keep the full £900,000 in cash until all family and tax uncertainties have passed, then reconsider investing in three years.

Best answer: A

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: Liquidity planning should distinguish between capital needed for known short-term liabilities, the emergency reserve, and genuinely long-term surplus capital. Amounts needed within 12 months should generally be kept in cash or short-dated, low-risk deposits because market volatility could force sales at a poor time. Here, the renovation, tax payment, school fees and emergency reserve total £475,000. Holding materially more than that in instant-access cash may feel safe, but it creates an opportunity cost because £425,000 has no identified short-term call and can be invested to pursue higher expected long-term return. The trade-off is not cash versus investment in the abstract; it is matching liquidity to timing and certainty of liabilities, then investing the surplus consistently with risk profile and capacity for loss.

• Retaining only £100,000 ignores fixed payments due within 12 months, so it exposes known liabilities to market timing risk.
• Keeping the whole £900,000 in cash over-prioritises liquidity and sacrifices expected return on money not needed in the near term.
• Borrowing to meet predictable liabilities adds leverage and cost when sufficient cash is already available.
• The balanced approach earmarks cash for short-term needs and moves surplus capital into the long-term investment reservoir.

The short-term liabilities and emergency reserve should be protected from market risk, while the surplus has a long-term horizon and can seek higher expected return.

Question 8

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

At an annual review, a CWM adviser updates a couple’s plan.

• Family and employment change: One spouse has been made redundant and the household income has fallen by £6,000 per month.
• Health change: The other spouse now needs private treatment and recovery support, expected to cost £35,000 over the next six months.
• Existing liquidity: They hold £28,000 in instant-access cash and have normal household spending of £7,500 per month.
• Investments: Their discretionary portfolio is valued at £900,000, with 75% in equities, after a recent 15% market fall.
• Objective: They still want to fund school fees of £42,000 due in nine months without increasing debt.

Which is the single best liquidity risk to flag in the review?

• A. They may need to increase equity exposure to restore the portfolio’s long-term growth rate.
• B. They may need to sell growth assets after a market fall to meet near-term spending and school-fee commitments.
• C. They may be underusing pension contributions while household income is temporarily lower.
• D. They may face an inheritance tax exposure if the portfolio recovers before the next review.

Best answer: B

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: A liquidity review focuses on whether available cash and near-cash resources can meet known and likely outflows without forcing unsuitable asset sales or new borrowing. Here, the redundancy reduces income, health costs create a large six-month call on cash, ordinary spending continues, and school fees are due within nine months. The £28,000 cash reserve is quickly exhausted, while most wealth is in an equity-heavy portfolio that has already fallen. The immediate risk is not simply that markets have fallen, but that short-dated liabilities may require crystallising losses or selling assets at an unsuitable time. The adviser should identify this as a priority review issue before considering longer-term growth, tax, or pension planning adjustments.

• Pension funding may be worth reviewing later, but it does not address the urgent cash shortfall.
• Increasing equity exposure would worsen access risk when near-term liabilities already exceed liquid cash.
• Inheritance tax planning is not the pressing issue created by redundancy, health costs, and school-fee timing.

The cash reserve is insufficient for the new short-term outflows, so planned and unexpected liabilities may force disposals from a depressed, equity-heavy portfolio.

Question 9

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

At an annual review, Imran and Sarah’s long-term portfolio remains suitable for their retirement goal in 12 years. Their adviser uses a separate investment reservoir for planned spending inside three years.

Liquidity policy: Deposit cash should equal the emergency reserve plus known payments due within six months, less secure net income surplus over that period. Spending due in 6-36 months is held in the investment reservoir.

Client facts:

• Deposit cash: £24,000.
• Investment reservoir: £86,000 in money-market and short-dated gilt funds.
• Long-term portfolio: £920,000, on target for the agreed strategic asset allocation.
• Emergency reserve: 4 months of core expenditure.
• Core expenditure: £7,000 per month.
• Known payments due within 6 months: tax £31,000 and roof works £18,000.
• Secure net income surplus before those payments are due: £12,000.
• Planned education cost due in 18 months: £40,000, intended to remain funded from the reservoir.
• The clients do not want new borrowing unless necessary.

Which recommendation best meets the liquidity policy without unnecessarily disturbing the long-term portfolio?

• A. Transfer £25,000 from the investment reservoir to deposit cash and keep the remaining £61,000 invested there.
• B. Keep deposit cash at £24,000 and arrange a short-term credit facility for the tax payment and roof works.
• C. Sell £41,000 from the long-term portfolio into deposit cash and leave the investment reservoir intact.
• D. Transfer £41,000 from the investment reservoir to deposit cash and leave the long-term portfolio unchanged.

Best answer: D

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: The liquidity decision should first ring-fence spending that cannot prudently be exposed to market risk. The emergency reserve is 4 × £7,000 = £28,000. The next-six-month payments total £49,000. The £12,000 secure surplus can fund part of those payments, so required deposit cash is £28,000 + £49,000 - £12,000 = £65,000. With £24,000 already held, the shortfall is £41,000. Moving that amount from the short-term reservoir to cash meets the cash need and keeps the retirement portfolio intact. It also leaves £86,000 - £41,000 = £45,000 in the reservoir, enough for the £40,000 education cost in 18 months.

• Selling from the long-term portfolio can disrupt the strategic allocation when suitable short-term funds are available.
• Moving only £25,000 fails to meet the calculated deposit cash target after allowing for the emergency reserve and known payments.
• Borrowing adds cost and risk despite sufficient reservoir assets, and it does not restore the agreed cash reserve.

Required cash is £28,000 + £49,000 - £12,000 = £65,000, so £41,000 is needed and the reservoir still retains £45,000 for the 18-month cost.

Question 10

Topic: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

A wealth manager is preparing a 12-month cash-flow projection for a UK client couple. They want to preserve a minimum emergency reserve and identify any amount that should be earmarked from their investment reservoir.

Current liquid assets and reserve target:

Projected cash flows for the next 12 months:

Assume no investment growth, tax adjustment, or change in spending. What amount should be earmarked from the investment reservoir to meet the projected 12-month cash-flow need while preserving the emergency reserve?

• A. £25,600
• B. £40,000
• C. £20,000
• D. £5,600

Best answer: D

What this tests: Liquidity, Cash-Flow Management, Funding Needs, and Liability Matching

Explanation: A cash-flow projection should combine recurring income and spending with known one-off events, then compare the resulting cash need with liquid assets that can be used without breaching the emergency reserve. The clients’ regular monthly surplus is £1,200, giving £14,400 over 12 months. The known one-off outflows total £40,000, so the net projected cash deficit for the year is £25,600. They have £50,000 in instant-access cash but want to retain £30,000 as an emergency reserve, so only £20,000 is available for planned spending. The residual funding need is therefore £25,600 minus £20,000, or £5,600.

• £20,000 is only the cash available above the emergency reserve; it does not allow for the annual income surplus.
• £25,600 is the projected net deficit before using accessible cash above the reserve.
• £40,000 is the total planned event spending, but it ignores regular monthly surplus and available cash.

The regular annual surplus is £14,400, planned event outflows are £40,000, and only £20,000 of current cash is available above the reserve, leaving £5,600 to be funded.

Continue in the web app

Use Finance Prep for interactive CISI CWM Applied Wealth practice with mixed sets, timed mock exams, topic drills, explanations, and progress tracking.

Related focused pages

• Free CISI CWM AWM Practice Exam: Applied Wealth
• Free CISI CWM AWM Practice Questions: Regulation, Ethics, and Consumer Duty
• Free CISI CWM AWM Practice Questions: Client Discovery and Recommendations
• Free CISI CWM AWM Practice Questions: Client Review and Suitability
• Free CISI CWM AWM Practice Questions: Financial Protection
• Free CISI CWM AWM Practice Questions: Pensions Context and Tax
• Free CISI CWM AWM Practice Questions: Retirement Income Strategy
• Free CISI CWM AWM Practice Questions: Social Investment and Philanthropy
• Free CISI CWM AWM Practice Questions: Private-Client Taxation
• Free CISI CWM AWM Practice Questions: Trusts and Estate Planning

Practice next step

Use the Finance Prep web app above when you want interactive practice beyond this static page.