What is cashflow modelling?
05.06.23
By
Ben Hewitt
This content was factually correct when written but may not reflect current developments or information.
Cashflow modelling is a process that combines the expertise of a financial planner with advanced software to provide clear answers to the questions posed when you’re planning your financial future.
It brings those answers to life with graphs and suggested strategies to meet your goals. It shows you what your finances might look like further down the line and whether you’re on target with your strategy.
And it addresses some of life’s most fundamental financial questions, such as when you can afford to retire.
How does cashflow modelling work?
Using a financial planner’s experience and cutting-edge software, cashflow modelling considers many factors surrounding your financial position – both now and in the future.
Details about your income and expenditure, savings and investments, debts, current and future commitments, and any anticipated inheritance or lump-sum receipts are fed into the process, as are your goals – things such as your retirement plans.
Cashflow modelling will show how well-equipped you are to realise these aims and what’s needed to put you or keep you, on the right track.
You can tweak the scenarios to see their impact on your finances – moving your retirement dates forward or back a couple of years, for example, or altering the expected returns on any investments you might hold.
What are the most common causes of cashflow problems?
In any financial scenario, there are some unknowns, such as inflation, interest rates and property values, so you should take a long-term view. For example, with interest rates, a planner would look at rates over the last 20 to 30 years and then take a conservative estimate for the future.
Cashflow challenges can be thrown up both by changes in personal circumstances and by wider market effects.
For example, changes to your health or that of a close relative impact your long-term finances, while the ebb and flow of your business can change your outlook. Or a property slump or a stock-market crash can impact your future if they form significant parts of your overall wealth.
We can be 100% certain that not everything will go exactly to plan, but using cashflow modelling gives you a headstart in building a holistic picture of what you might expect to enjoy over the long term.
When is cashflow modelling used?
Cashflow modelling can be used whenever you want to plan for a long-term major financial decision – any big questions about money.
Questions it can help to answer include:
When can I retire?
How much money do I need for the retirement lifestyle I want?
Can I gift my children money and still have enough to live on?
How much should I sell my business for?
Can I afford to pass my business down a generation without it affecting my lifestyle?
It can also address questions around health and later life, such as:
Will my family be financially secure when I die?
How will it affect my family’s finances if I have to go into permanent care?
How can cashflow modelling help?
However careful and frugal you are with your money, unexpected financial situations will crop up.
It doesn’t matter how well off you are – if your financial situation suddenly changes, it can significantly impact your whole future and that of your family after you’ve gone.
Cashflow modelling can help in these situations because combining an experienced financial planner and the power of the dedicated software can help analyse things logically and dispassionately.
You might find that your long-term situation hasn’t been as drastically affected by recent events as you first feared. But if changes to your plans are needed, cashflow modelling can show you how best to achieve them.
What information is needed to provide an accurate cashflow model?
Cashflow modelling requires facts and figures, including net worth, assets, investments, mortgages, pension savings, expenditure, and income. The source of the income and the applicable tax rates are also key pieces of information.
On top of that, any expected future financial fluctuations need to be added to the model – are you expecting a significant inheritance, for example, or have you committed to helping with the grandchildren’s university costs?
But just as important as all this is understanding you as a person. Where have you come from? Where are you now? And, crucially, where do you want to be in the future?
The more information that can be fed into the system, the more accurate the planning for your future can be, and the result can be a more detailed plan on how best to achieve your goals.
As Ben Hewitt, Chartered Financial Planner at Alan Boswell Group, explains, “It’s a case of really thinking about what clients require.
“They may think they want £50,000 a year in retirement, but is it actually possible to spend that much when you’re 80? We tend to find that clients want to spend a lot in the first 15 years of retirement, and then it tails off.
“This is where cashflow modelling comes into its own. We can factor in a gradual slowdown of work, different pensions coming in at different ages, expenditure rising and falling as retirement is enjoyed and then passing capital down to children over time. All of this can be factored in.”
Next steps
If you want to learn more about cashflow modelling and how we can help you plan for your long-term financial future, contact one of our experienced independent financial planners.