Cashflow forecasting and the intangible value of a financial planner

By David Snelling

From some of the initial conversations I have with new clients, it seems to be a common belief that financial planning boils down to putting a plan together, reviewing it every year, and then planning your income when you retire.

There will be an element of investment choice, and some time taken around tax planning, but generally the perception is that it’s all about a plan.

I see this as a misconception, for a number of reasons.

While there is obviously an important element of planning involved, the client-planner interaction is much more about developing a long-term relationship and helping you understand your attitude to wealth and money.

It also means you have a trusted financial confidant to bounce ideas off and take suggestions and guidance from. It could even go as far as having someone to challenge you, though in an  empathetic manner of course!

Using cashflow forecasting to inform your decision-making process

Much of our relationship will develop through conversations, but when it comes to helping you understand your future we will make full use of cashflow forecasting.

This involves using sophisticated financial modelling software to provide invaluable information about your financial status and future projections of your wealth, all in a visual format rather than as numbers on a spreadsheet.

We will input up-to-date details regarding your income, outgoings, existing assets, and your current and future liabilities to create an accurate picture of how your finances look now, and how your wealth could fluctuate at certain times during your financial journey.

To my mind, cashflow forecasting really comes in to its own when you start inputting assumptions and scenarios.

These will consist of certain variables that will have an effect your financial situation. Some of the most common scenarios we can take into account include:

  • The assumed growth rate on your investments
  • Current and projected rates of inflation
  • Your expected salary progression and how your income may vary
  • How you expenditure may vary at different life stages, such as comparing the active and more sedate years of your retirement
  • Your projected longevity.

More importantly, perhaps, are “what if” scenarios, and projecting forward to key milestones in your financial journey.

These could include providing important financial information to help you address certain questions you may have about your possible future plans.

Some common questions I have used cashflow forecasting to help answer have been:

  • Can I afford to retire within the next 12 months?
  • How would my finances be affected if I sold my company?
  • What financial adjustments will I need to make if I return to the UK next year?
  • Should I pay off my mortgage early or consider making additional pension contributions?

Effective financial modelling of this kind helps you make informed decisions about your financial future. It can also help you understand the effect of potential choices you face, and what “enough” means when it comes to making the eventual decision to stop working and live on your accrued wealth.

It can also help you to prioritise financial goals, so if you are not on track to achieve everything you desire it can help you work out what levers need to be pulled. Interestingly,  for those people who are on track to having more than enough, it can help reshape some goals which perhaps were not articulated at first for fear of not seemingly being attainable.

The value of planning advice

While cashflow forecasting can help illustrate a time when you may be able to live comfortably without the need for any further income accrual, sometimes it can take an actual conversation to help you fully understand your true wealth.

A recent chat I had with “Steven” a long-standing client, illustrated this point to me, helping me realise how developing a mutually respectful relationship can be so important.

Steven is financially independent and has reached that position through following the right habits.

He has worked hard, saved well, and made a series of prudent financial decisions during his working life; to the extent that he has was able to stop working far earlier than he had originally intended or believed would be possible.

The accrued value of his assets means that he can live very comfortably, and his effective estate planning arrangements means his children will benefit from his wealth when he dies.

However, he is still inhibited by the instinct of making prudent spending decisions and seemed unwilling to benefit from that same wealth during his own lifetime.

He wanted to purchase a car, but had set himself a budget that, typical to Steven, was most modest. I see plenty of people driving around in cars double the value of his budget and yet suspect that their net worth is less than 10% of his!

One of the key points I stressed to him was the difference between being rich and being wealthy. In their desire to somehow validate the former, many people will often look to expensive purchases, whereas the reality is they have only managed to do this through borrowing.

On the other hand, when you are genuinely wealthy you are less likely to be troubled by needing to prove it to others.

He agreed that his prudence had acted as a disincentive for him to spend a lot of money on this one item. Consequently, after discussing it with his wife, he doubled his budget to buy a car he had actually been looking at for years, hoping that second-hand versions would drop in value, but had stubbornly been holding their value.

On the face of it, that may sound simplistic, but I saw this as a real sign that my role as a financial planner was not only about helping Steven plan his future, but also as trusted confidant who could tell him the truth about his wealth and what he could do with it. After all, if he doesn’t spend it, someone else will!

The intangible value of advice

Not knowing what will happen can make it difficult to plan for the future, particularly for long-term objectives such as your retirement.

However, by using cashflow forecasting, you can get an idea of what your financial future may look like, and how unexpected events could affect your plans.

That’s why for a number of years now have put cashflow modelling at the centre of everything I do for my clients. It helps them build their financial plan and stay on track as we review it on a regular basis.

But an experienced financial planner can mean far more to you than simple planning. As you read in the case of Steven, it was about him having someone to convince him of his true wealth, and why he shouldn’t resist enjoying the value he’d accrued during his own lifetime.

Get in touch

If you would like to talk about your own financial planning arrangements, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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