Corporate Risk Management – Cash Flow at Risk implemented in ITS

17 December 2008

ecofinance, the leading developer of treasury management software within the German language area, focuses on close cooperation with universities to continuously improve the functionalities of the integrated treasury system ITS. Bernd Steinberger recently completed his diploma thesis at the Institute of Banking and Finance and it has now been implemented in ITS. This enhancement of the value at risk approach also integrates operative cash flows into the risk ratio.

“Working together with universities is a win-win situation for both parties. One the one hand, students gain an insight into the practical use of scientific analysis, and, on the other hand, ecofinance ensures state-of-the-art software solutions”, describes Dr. Karlheinz Schlögl, Managing Director at ecofinance, the motivation for the long-term cooperation with the University of Graz.
Bernd Steinberger has written his diploma thesis, “Cash flow at Risk”, at the University of Graz’s Institute for “Banking and Finance”. The concept for implementing it in the integrated treasury system ITS was also developed by the ambitious Product Manager.


The well-proven “Value at Risk” ITS module is used for financial instrument portfolios. The new “Cash flow at Risk” module makes it possible to consider – in addition to financial cash flows – a company’s individual revenues and cash flows as well. In contrast to the value at risk for the short term risk ratio, it makes sense to use the cash flow at risk for long-term analyses (months, quarters or years) as well. Therefore, risks can be identified in time and liquidity planning can be optimised.
The cash flow at risk is targeted at the downside risk. This means that the maximum shortfall of a cash flow is measured within a certain period with a certain probability. All cash flows can be integrated into the risk ratio calculation company-wide. As a result, the CFO gets one single benchmark that can easily be compared and communicated.
There are three possible approaches to calculating the cash flow at risk: bottom-up, according to J.P. Morgan’s RiskMetrics; top-down, considering historical cash flows; and an exposure based approach that considers macroeconomic variables as well. On account of its flexibility, ecofinance uses the bottom-up analysis and includes market price risks in their calculation. As a matter of course, individual customising is offered.

Five steps for calculating the cash flow at risk

Bernd Steinberger proposes five steps for measuring risk and has implemented them in the integrated treasury system ITS: After defining the period under consideration and the confidential level (1), functions of different complexity levels are calculated (exposure mapping). These functions describe the correlation of the financial result and the market price. Based on the forecasted distribution of the risk factor, a Monte Carlo Simulation, which displays possible future price developments, is processed (3). In this way, more than 10,000 price paths or scenarios for each risk ratio are created. Market prices are deducted for each scenario and integrated into the exposure map. Finally, possible future financial results can be determined (value calculation (4)). Afterwards, the actual risk calculation takes place.


A company plans to generate cash flows in the amount of 15 million Euros in the upcoming year and an absolute cash flow at risk of 12 million Euros is calculated at a confidential level of 95 percent and a planning horizon of a year. This means that the company is up to 95% sure that the total cash flow in the upcoming year will not be less than 12 million Euros or that the forecasted total cash flow will, at most, fall short by three million Euros (relative cash flow at risk).

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