Managing the Business Cash Flow Risk

If you have an ocean of cash, it is limitless. However, for most business has only a pond of money that sometimes even dried up after meeting its financial obligations. Cash flow risk is the possibility of failing to meet the cash needed to maintain smooth business operation. A poor cash management increases the business cash flow risk and creating a problem on working capital. All business faced the cash flow risk. However maintaining or even implementing best practices the company can enhance cash flow risk management and secure funds most needed.

Most businesspeople confused profit and cash flow are the same. For clarification, cash flow is not merely a data on the balance sheet, which can be expressed as positive, cash flowing in, and negative money flowing out. Ideally, the business wanted a positive cash flow, which shows a lower financial risk for any business type. Nonetheless, it is possible to have a negative profit but still maintain a positive cash flow.

For such reason, cash flow requires separate financial documentation to monitor all cash flowing in and out based on the different business activities such as investment, financing, and operations. Comparably, the income statement recorded expenditures, sales, and profit. Indeed the cash flow and income statement are connected, but these are not the same. Profit is not always positive. A negative profit increases the cash flow risk.

For investors and creditors, they look for value generation and business sustainability in which the long-term positive cash flow is an excellent indicator. Therefore, managers focus on maintaining low cash flow risk, a sign of good financial health, and the possible growth of the business.

During a crisis, the lack of available capital can impair the viability of the business. The business must meet the account payables, debts, and operating costs. A poorly implemented cash management system may put the company on the edge of catastrophe, all attributed to the lack of cash to meet its financial obligations.

In understanding cash flow risk, there are several important terms to recognize:

Any changes in the market may result in shortages in the expected cash flow of the business is called the cash flow at risk (CFaR). Similarly, if the company is considering the potential loss of an investment during a specified period, which may exceed the business established threshold is called Value At Risk (VAR). On the other side, the liquidity at risk is the capacity of the company to meet all the short-term financial obligations.

A wide-ranging cash flow risk management strategy takes into consideration several situations that cash flow can affect:

The manager evaluating the business operational strategy needs to look into the standards and practices management set for meeting the account payables, setting the account receivable and scheduling of the procurement. These are the areas that have a profound effect on the cash flow of the business and impact its liquidity risk. At the same time, market risk is associated with business finance options. Particularly for small business currently struggling due to a limited capital market investment and credit choices find it challenging to improve cash flow immediately. During a crisis, the problematic situation for business is heightened. Also, a sharp industry downturn for any reason may result in the company losing customers or increase operating costs.

All business needs to consider its significant investments, though long –term can undeniably affect cash flow. The business trying to meet the interest payments mat needs to allocate a massive amount of cash during a given period. Moreover, investment in real estate properties or equipment can reduce liquidity in the immediate future. Another important consideration is to balance debt and equity payment to attaining a low cash flow risk. A business maintaining too many short-term liabilities may find they were in crisis when creditors called in when cash is small.

For a cautious manager, the focus is not only on the profit level of the company but, most importantly, on the cash flow status of the business. In properly managing the cash flow risk is the key to avoid unnecessary risk while at the same time preserve the value proposition of the business.