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Definition

Cash flow risk

Definition (1):

Cash flow risk is the danger that cash flows from a banking organization may fluctuate widely due to economic conditions, service mix, and other factors; a merger may help to reduce this risk by combining baking organizations and services packages that have different cash flow patterns over time.

Definition (2):

Cash flow risk is used for describing the probable danger of shortage generated by the cash flow management systems. The lower this risk, the better equipped the organization will be for using its working capital efficiently.

Managing cash flow risk can feel alarming. But an organization can optimize this risk management by implementing the best practices. Thus, it can have the needed fund at the right time.

Some may confuse profits with cash flows, but cash flow is a process, not merely a number on the company’s balance sheet. It can be either positive or negative. Negative cash flows present a greater financial risk for companies of all types and sizes, specifically, because a business can have negative cash flows while still earning a profit.

For the above reasons, companies have separate financial documentations for recording all cash inflows and outflows through their financial functions, activities, and investments. This separate documentation is known as a cash flow statement.

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