“Cash Flow at Risk (CFaR)”


Cash flow at risk (CFaR) is a corporate treasury concept that defines the degree of vulnerability of a company’s future payables and receivables to the potential variations in the markets.

CFaR is a central element to elaborate a business risk assessment as it helps the management team to identify and measure the dynamics of the risks affecting the company as well as to anticipate the different stress scenarios that may affect the company’s activity or its profit margins.

The causes of this risk might be diverse depending on the business model. Oil and commodity prices, interest rates or foreign currency volatility, are some of the most frequent sources of risk for businesses although they are not the only ones.

For example, a European exporting company selling products in the U.S. market can forecast 10,000,000 EUR in revenue from its U.S. sales. Since those sales are produced in U.S. dollar, the EURUSD exchange rate is an inherent source of risk for that business line, as any depreciation of the dollar would have a negative impact on the company’s revenue.

In order to define their FX risk management strategy, the company elaborates a model that defines a 30% possibility that the USD depreciates between 5 and 10% against the dollar over the next three months. In that case, the company’s cash Flow at Risk is 1,000,000 EUR.

Measuring the Cash Flow at Risk

The identification of the Cash Flow at Risk requires a thorough analysis of the business cycle:

  • Elaborate a complete risk map;
  • Analyse market statistics;
  • Create a probable model;
  • Define the potential impact on the business line.

Even though the treasury and risk teams are the ‘owners’ of the CFaR concept, the business analysis behind it needs the input of all teams in the company to achieve a more accurate and reliable risk assessment model.

The real purpose of an accurate CFaR definition extends well beyond the percentage of the revenue that is exposed to market volatility. The whole risk mapping process provides a complete insight into the potential risk factors for the business, improves the team’s understanding about the dynamics of risk elements, sets the ground to develop contingency plans to react to future stress scenarios and defines the risk limits that the finance and treasury managers are allowed to assume.