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Cash Flow at Risk: Time to Focus is Now - Risk and Financial Services - Global

Cash Flow at Risk: Time to Focus Is Now

By some measures, volatility in financial markets is receding. But for chief risk officers, treasurers and chief financial officers, the financial crisis has delivered some harsh lessons, and there are still risks to the business that can't be ignored:

The risks, just to name a few, are serious:

  • a potential upturn in inflation, with higher interest rates
  • underforming pension assets
  • sluggish or declining revenues in a prolonged period of subpar economic growth
  • deteriorating credit quality of buyers and suppliers.

Any of these risks could threaten your corporation's ability to fund necessary expenses such as debt service and pension obligations, or to pay dividends. And no one is betting that financial volatility won't come back with a vengeance, wreaking havoc on company cash flows.

Corporate challenges on the cash front

How well prepared is your organization to manage sudden and unexpected runs on cash? You can begin by answering the following questions:

  • Is your debt service sufficiently laddered to protect your organization from a sudden increase in interest rates?
  • Is your floating-rate exposure manageable?
  • How would the unfunded pension obligations hold up to changes in interest rates and equity prices?
  • Do you have the ability to consolidate the impact of changes in many factors together, such as interest rates, foreign exchange, inflation, equity prices and commodities, on your company's aggregated cash flows?

How Towers Perrin Analyzes Cash Flow at Risk

If your organization is interested in solutions to prepare for uncertain future cash flows, you need the right tools and expertise.

Towers Perrin's Cash Flow at Risk Analysis begins with an inventory of all cash-flow items subject to changes in interest rates, foreign exchange rates, equity and commodity prices as well as macroeconomic factors, such as inflation.

Next, we feed this information into our Cash Flow at Risk Model and Analysis System, which combines our analytical and risk management capabilities with our well-established pension expertise. We simulate all cash flows under extreme movements in financial and macroeconomic factors. We then evaluate the net exposure to a company's cash flows under expected and worst-case conditions. We also calculate the expected cash-flow shortage if extreme market conditions are realized.

Finally, we identify the biggest contributors to this cash shortfall and recommend hedging or other strategies that can control at least some of this exposure.

Towers Perrin's Cash Flow at risk Model and Analysis System provides an objective evaluation of the potential impact of the macroeconomic environment on a company's cash flow. It can help your organization now, and in the future, whether the markets are up or down.

To discuss how Towers Perrin can assist your company, please contact us to learn more.