Cash flow risk

Experts, Do you have idea about definition of Cash-flow at risk. I consider it as tool used by nonfinancial firms or corporate finance. Cash flow refers to operational cash flow, and  time horizon, in general, will be on quarterly, semi-annual, or annual basis.   But some of my colleagues argue it should be  on a daily basis, similiarly as VaR.

Any comments and ideas will be appreciated.

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  • Cash-Flow at Risk --- This is absolutely a big deal for credit risk and it can be measured in many different ways.

    Perhaps one of the more popular techniques is to track solvency ratios such as Altman Z-Scores and current ratios, measure the spreads between DPO (Days Purchase Outstanding) with DSO (Days Sales Outstanding).

    These measures can be shown with confidence levels and they can be stress tested if need be.  If you are interested, I also have a spread sheet template I can send to you that calculates these various measures of risk.

  • Hi,

    In my opinion the typical VaR approach does not work in tracking potential cashflow risks, because the cycles are at least monthly or longer, there are no cash assets being monitored, and the losses are not observable. 

    Cashflow risks relate to 1) a gradual deterioration of debt collections 2) significant / sustained trading / operational losses that drain cash resources 3) capital projects that go over budget and suck up cash. 

    The firstmentioned is the most difficult to track and control - it needs to be measured as a trend and a risk event occurs when the pre-agreed threshold compared to the same period a year ago, etc is exceeded.

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