What is cashflow modelling?
Posted by Andrew_Smith on Wednesday 22nd of April 2020.
“In this world nothing can be said to be certain, except death and taxes.”
Financial planning is all about preparing for those things that may not be so certain (and taxes). Plans should be reviewed regularly so they adapt to changes in your circumstances and reflect developments in the wider economy and financial markets.
Cashflow modelling, sometimes known as cashflow forecasting takes a view of investments, debts, income and expenditure. It takes in to account things like inflation, changes in income and interest rates.
It can then be used to model a range of different scenarios to help you make informed choices about your finances.
The heart of any sensible long-term financial thinking
In essence cashflow modelling provides a rolling balance sheet that has your income, savings, investments and other assets on one side and your spending requirements and commitments on the other.
With this information to hand, it is possible to assess your current situation. By adding in assumptions about the possible direction of variables such as inflation and investment returns, predictions can be made about how your situation might change over time.
In turn, this can help inform decisions such as when might be the optimum time to retire and how best your retirement income might be funded. It can also embrace estate planning, allowing you to put plans in place that can mitigate any potential Inheritance Tax liability.
Flexible forecasting and planning
Cashflow modelling is endlessly flexible and takes account of your personal preferences. You might want to determine the impact of moving to a smaller property at some point – perhaps when your children are financially independent, or when you retire.
Similarly, you might want to explore the merits or otherwise of accessing part of your pension savings sooner rather than later – in other words, before you retire. How would that affect your income after retirement? Cashflow modelling could help provide the answers.
Cashflow modelling also allows for examination of “What if?” scenarios. What if there’s a financial crash? What if there’s a change in your family situation, such as the arrival of grandchildren or a divorce? What action should you take in anticipation, either now or in the future?
Your financial forecasts will be shaped to a significant degree by your attitude to risk. Some people are bullish about potential gains from their portfolio, while others want to achieve as much security and certainty
as possible. Thinking about the future will help confirm how you feel on these matters. If you expect to generate investment growth, you might choose to maintain an active interest in equities even beyond retirement. If you’re more risk-averse, you might prefer more safe haven assets or options. Or, of course, you might opt for something in between.
An active eye
We’re here to help you decide on a strategy that suits your preferences, but we won’t then sit back and simply watch how events unfold.
We’ll work with you to maintain your cashflow model, refining and repurposing it so that it continues to match your preferences, however they develop.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
It is important to take professional advice before making any decision relating to your personal finances.