Estimating Cashflow-at-Risk (CFaR)

Abstract

Of the many risks faced by restaurants, a shortage of cashflow is among the most damaging. This study introduces an effective tool to estimate the cashflow risk of restaurants, so that firms can be ready to address the potential risks. Using a comparables approach to Cashflow-at-Risk (CFaR), the study analyzes cashflow data from publicly listed U.S. restaurant firms from 1988 to 2007. The study found that estimated cashflow shortfalls were larger for small and medium-size firms than for large firms. Also, full-service restaurants’ cashflow shortfalls were larger than those of limited-service restaurants, suggesting relative cashflow risk positions for different restaurant segments. This study provides nonfinancial firms such as restaurant firms with a practical tool to estimate cashflow risk, which could mitigate the probability of financial distress and improve the financial health of firms.