What is cash flow modelling and why it is important
What is a cash flow model?
A cash flow model is a detailed picture of a client’s assets, investments, debts, income and expenditure which is projected forward, year by year, using assumed rates of growth, income, inflation, wage rises and interest rates.
Cash flow modelling is appropriate for individuals who wish to become and remain financially well organised, determine and achieve financial lifetime goals, create a lifetime plan and manage their tax liabilities.
How does the process work?
At Cowgills Wealth, we fully involve our client in the cash flow modelling process and get to know and understand their goals and aspirations for themselves and their family. We don’t make assumptions or reply on guesswork when it comes to our clients’ aspirations for lifestyle and spending.
A cash flow model is only as good as the information available which is why we take the time and care to fully understand our client’s needs and we make sure that we are kept updated about inevitable changes to a client’s circumstances and can review and update the model accordingly.
There are of course assumptions to be made regarding projected inflation and growth rates which we explain to our clients and continually review.
The client’s bespoke cash flow model demonstrates to the client their current position relative to their preferred position and their goals and helps to put plans in place to achieve those goals.
How could cash flow modelling help me?
Cash flow modelling is particularly useful when we model different scenarios based on decisions that clients may make. This can help to understand the potential financial impact of investment, lifestyle and spending choices.
You will be presented with a clear and detailed summary of your financial arrangements along with an analysis of your personal expenditure planning assumptions, balancing your cash inflows and their desired cash outflows. We can estimate future cash flow based on realistic assumptions.
The process will help you focus on what life you aspire to for you and your family and begin working towards it.
It can provide peace of mind that adequate provision is in place for the financial consequences of the death or disablement of you or your partner.
You can also make plans to minimise your tax liabilities and be aware of any tax issues which are likely to arise on death of either you or your partner.
We can also help you develop an investment strategy for capital and surplus income in accordance with your attitude towards risk, flexibility and accessibility.
Review regularly the model and use an expert
Cash flow modelling is not a process to be carried out once – a cash flow model is a fluid document that must be revisited on a regular basis. In that way you can be certain that it will always reflect your circumstances should anything change. Even minor changes can make a huge difference in the longer term.
Frequently reviewing cash flow modelling keeps it on track and as your circumstances change this will impact how useful it is unless reviews are undertaken.
Cash flow modelling is not only an effective tool for those with wealth to help them manage it and make sensible decisions, it is also great for those accumulating wealth enabling us to reach decisions with our clients on how much needs to be saved and the return required. By matching your present and expected future liabilities with your income and capital we can make recommendations that will ensure you don’t run out of money before you run out of life and that you are capable of living the life you want to live.
The Financial Conduct Authority does not regulate Cash Flow Modelling.