What is Cash Flow At Risk
As a stream of cash flows regularly through your business, it is critical to do effective cash flow management, or else your coffers may dry up when you want to pay your vendors and clear due bills. Therefore, cash flow risk is the term for the dangers to your business if you fall short of the cash flow needed to run your business. Thus, the lower the cash flow risk metric, the better your company’s cash position (the money your organization has at any given moment), and you can manage your working capital efficiently. Also, this metric should be integral to your organization’s overall financial risk framework.
Correlation of Cash Flow Statment and Cash Flow at Risk
There is a deep correlation between the cash flow statement and the cash flow at risk metric. Firstly, it is imperative to understand cash flow; it is not a number on your financial books but a process that can potentially make or break your company. An organization can have positive or negative cash flow irrespective of the profit position of the organization. So, it is crucial to record the cash flow and make a cash flow budget — as a P&L statement cannot give the true picture of your cash inflow and outflow. So, you have to create a cash flow statement to define your net cash flow and make projections of the cash flow you need to sustain in the long run.
Long-term positive cash flow is an indicator for any business for growth, credit worthiness, and it is a metric that showcases an organization has good financial health. Now, when you have a cash flow statement, you have a benchmark that you can use to define the cash flow at risk metric.
Metrics to Evaluate
Measuring and evaluating the cash flow at risk will help you to define your KPIs and KRAs on a quarterly or yearly basis and make strategies for the future. It is there
- Cash Flow at Risk (CFaR): This is the critical metric that is the crux of all your cash flow woes! It defines how much your cash flow can fall short of concerning the market changes and the extent of those changes in terms of risk.
- Value at Risk: It is the metric used for measuring the loss of potential investment over a given time, expressed as a probability.
- Liquidity Risk: An assessment through which an organization can assess its capacity to cover its short-term financial obligations, and it increases when an organization lacks the working capital to meet those needs.
Therefore, including these metrics in your overall strategy is essential to measure risk associated with Cash Flow.
Strategies to Reduce Cash Flow at Risk
There are some common practices to optimize your cash flow and reduce your cash flow at risk. When you evaluate cash flow, you should have a few things in consideration that will help you to optimize your cash flow:
- Market Conditions: Always have an overview of forthcoming market conditions that will help you to form an overall budget for your organization and have a rain fund to sustain your organization in the long term. For instance, during the Covid pandemic, thousands of MSMEs were forced to shut their doors because of the situations created by the pandemic. They don’t have the strategy to survive in dire situations. Therefore, predict the worst outcomes and have enough working capital to sustain your organization.
- Cash Flow Optimization: Cut nooks and corners where there is unnecessary spending within your company to optimize your cash flow. SaaS platforms, such as CredFlow, will help you to optimize your cash flow by cutting unnecessary expenditures and reducing bad debts by giving you 360 degrees of your revenue line.
- Operation Strategy: When the economic situations turn unfavorable, you have to do an internal evaluation and do cost-cutting wherever it’s possible to sustain your business.
CFaR is a critical metric, and you should monitor this metric critically in your business. Reducing CFaR will help you to grow your business exponentially and lead your organization to the next growth phase.