An overview of what cash personal cash flow modelling is, how does it works and the benefits.
What is cash flow modelling?
Cash flow modelling is a tool used by Lifestyle Financial Planners to help clients understand their current financial position and their future financial position by generating a graphical, financial planning forecast.
In short it shows a client whether or not they may run out of money in the future, whether they may have ‘too much’ money, when they may be able to retire or if they can afford to treat themselves to a luxurious holiday or other big expenditure.
The actual forecast is created by the financial planner. However the key to generating the most effective plan is reliant on the financial planner asking their clients the right questions first.
The questions must focus on the client, taking into consideration the client’s goals, objectives and aspirations.
Examples of effective questions are:
- What is the client’s level of income and expenditure?
- Are they expecting any changes to their incomings and outgoings, for example receiving an inheritance?
- Are they planning on staying in their home or downsizing?
- What age does the client want to retire?
- Are they saving for an expensive event, for instance a child’s wedding?
What are the benefits of cash flow modelling?
As a result of the cash flow forecast, a client’s financial future is understood and strategies can be made with the client to ensure that they for instance, do not run out of money, or conversely, plan their future in the knowledge they can retire far earlier than ever conceived.
A financial forecast offers clients invaluable peace of mind.
It is important to remember that a cash flow forecast is not 100% accurate as there are many assumptions made, i.e. investment growth and inflation. There are also many variables to consider, not least changes to clients circumstances. However it is an effective tool to help illustrate a client’s financial future, accepting the fact that nothing in life is certain.
A beneficial way of keeping the forecast as accurate as possible is regular meetings with clients, ideally at least once a year.