If you’ve ever been involved with running or managing a business, it’s likely you’ll be familiar with the concept of cashflow planning and modelling.
Without careful cashflow control, many businesses put themselves at risk of failure. Running out of money means they can’t pay suppliers or wages, bringing their viability into question. Indeed, the Guardian recently reported that 2 in 5 of the UK’s small businesses – around 2 million firms – had less than three months’ worth of cash left to support their operations.
If you want to ensure you meet your financial goals, cashflow modelling is also a key component of your financial plan.
It’s a useful way to determine if you are on track to achieve your financial goals and that you’ll have “enough” to support your ambitions – whether that’s to retire early, make a legacy gift to support your family, or start your own business.
Cashflow modelling gives you a visual illustration of what you can expect in the future, empowering you to make key financial decisions that can be genuinely transformative. Here are four ways it positively supports your financial plan.
1. It requires a clear focus on your goals
When it comes to creating a bespoke financial plan, we always begin by focusing on your goals first.
Visualising your dream future – and sharing that vision with us – means that we can create a plan aligned with your goals. Everyone’s goals are different and personal to them. For some it is all about achieving a certain lifestyle, whilst for others it could be about achieving financial security and independence, or maybe starting a philanthropic legacy.
Cashflow planning provides a clear projection of your future wealth and gives you a solid starting point to be able to model scenarios around your plans and aspirations.
If you’re in a comfortable position to meet your goals, the model will show you. Alternatively, if you’re not, we can make adjustments to get you on track. A cashflow plan can also inform discussions such as:
- “Will we have enough money to do what we want?”
- “Will my family be looked after?”
- “What impact will investing my capital in illiquid assets, such as property, have on my retirement?”
- “When can I afford to retire?”
- “What level of spending is sustainable in retirement for me?”
This approach ensures that you are always focused on the “why?” and purpose of money, and that your goals are front and centre of any financial plan.
2. It can help determine exactly how much investment risk you need to take
When a financial planner asks you how much risk you are prepared to take with your investments, it can be tough to answer. In many ways it’s very subjective and does little more than explore your psychological relationship with risk.
So, how do you determine how much risk you’re prepared to take when investing? Can you put a figure on it?
A cashflow plan can bring clarity to this question as it helps to determine the exact return your savings and investments need to generate to meet your goals over a defined period.
If you know what your goals are, inputting information such as your income, assets, and outgoings into a cashflow plan can establish exactly how much you need your wealth to grow over a certain time frame.
It could show you that you are currently being too cautious, and that you’ll either need to save more or increase the investment risk you’re prepared to take to meet your goals.
Conversely, it might reveal that you’re taking more risk than you need to, and that you will have enough to meet your goals without exposing yourself to so much volatility.
3. You can plan more carefully for external risks
However carefully you plan, life has a way of putting unexpected challenges in your path. Without the right planning, these can easily derail your progress and delay the achievement of some of your goals.
Your cashflow plan will identify risks that may include:
- Volatile or falling stock markets
- Impact of ill health
- Loss of employment
- The death of a loved one
- Rises in inflation / living costs
- Changes in taxation or legislation.
We can then model a range of scenarios – for example, simulating a drop in the markets just before you retire, or planning for higher than expected inflation – to ensure that you can still draw the income you need to sustain your lifestyle in retirement.
Your cashflow plan will also show where you need to take additional steps so that, should misfortune strike, you can cushion the impact. An example of this might be putting some protection in place to ensure there’s a capital injection on the event of ill health or premature death.
Planning for these risks does not make them less likely to happen, it just means you will be better prepared should they occur. An analogy often used is that a cashflow plan is the equivalent of a map or sat nav when driving a car on a long journey. Would you attempt to drive from John O’Groats to Land’s End without a route planner? And what would you do if a key road were closed?
4. It encourages a regular review, which can help support your progress towards your goals
Developing a long-term relationship with a financial planner, rather than taking one-off advice, can add significant value.
Indeed, Vanguard estimates that working with a planner can add about 3% a year in net returns over the long term to your portfolio, depending on your specific circumstances.
Additionally, a landmark study by the International Longevity Centre (ILC), published in December 2019, found that receiving professional financial advice between 2001 and 2006 resulted in an average total boost to wealth (in pensions and financial assets) of £47,706 in 2015 terms, when compared to those that didn’t receive advice.
The study found that advised affluent individuals had 17% more in terms of assets than affluent non-advised individuals. Furthermore, those who reported receiving advice at both time points in the analysis had nearly 50% higher average pension wealth than those only advised at the start.
For your cashflow plan to remain effective, you and your planner need to update it regularly to take account of changing events.
Whether that’s a change in your circumstances or a period of high inflation, as we are seeing now, reviewing and altering your plan can help you to stay on track to meet your goals.
To continue the travel analogy, imagine if a pilot was flying you on your holiday from London to Hawaii. They were two degrees off track at the start and never course corrected until they thought they were due to land.
At the beginning it may seem to make little difference but, if not corrected soon, then the likelihood would be that you missed landing in Hawaii altogether. Regular reviews and small course corrections are vital to staying on track.
Cashflow modelling encourages this collaborative and long-term relationship, which offers both financial and emotional benefits.
Get in touch
If you’d like to find out how cashflow modelling can help you to create a bespoke financial plan that works for you, or you’d like to review your current plan in the light of current events, please get in touch.
Email or contact us on 020 7400 4700.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.