About Cash Flow Risk

The Bureau of Labor Statistics (BLS) data between 1995 to 2015 shows that corporate failure rates have not reduced since 1995. That 80% of business eventually fail. Recall GM? I infer from this that the effectiveness of business management tools, has not improved since 1995, i.e. we need new approaches if we are to reduce this failure rate.

My original 10-years of modeling work on loss risk with commercial and residential mortgages losses can be condensed into a single graph, The Risk Center Fold, below. It graphically summarizes all the statistical loss properties in one diagram. In general, loss probabilities, given a loss has occurred, take the shape of a distribution that is skewed to the right and is applicable to all forms of loss risks.

From a cash flow perspective, the graph depicts an equivalent cash flow loss behavior given a negative cash flow outcome. That is, most of the time cash flow loss tends to be a small negative when a loss occurs, but sometimes this can be a large negative. This extreme negative (right side of graph) is what kills a company and explains why the BLS data shows that corporate failure rates have not changed since 1995, and why a US Bank study showed that 83% of business failures were to due to cash flow problems.