Predicting what will happen in the future can be tricky. As the last couple of years have shown us, no one can ever be sure quite what is around the corner, and life can often put unexpected problems – and opportunities – in your path.
If you have ambitions – to retire early, help your child onto the housing ladder, or to change career – knowing how your finances might support such a goal makes planning much easier.
While no one has a crystal ball, there is one way that we help clients to plan and prepare for their future. Cashflow modelling can help you to understand what your financial future looks like, meaning you can make more informed decisions. Read on to find out more.
Cashflow planning can help you to reach your goals
If you’ve ever run or managed a business, you’ll be familiar with the concept of cashflow planning.
In a commercial context, it involves looking at the assets and income of a business over a period of time and balancing these against current and future liabilities. You’ll consider factors such as:
- Forecasts for future income and expenditure
- The objectives the business has, in terms of growth or expansion
- How to find efficiencies in delivering these objectives.
You can also model different scenarios to consider the impact of, for example, a significant rise in sales/orders and how this might affect your costs or recruitment.
A business with a strong cashflow plan attracts investors, as it shows your income is dependable, you’re in control of liabilities and expenses, and that you’re managing risk.
We apply the same principles when it comes to personal financial planning.
We start by identifying exactly what your personal goals are. These might be to:
- Start your own business
- Buy a home
- Help your children financially, perhaps through education or to buy a property
- Retire early
- Leave a legacy to your loved ones.
There are many other goals you might want to achieve along the way, too.
A cashflow plan maps out all your current and likely future needs, and your life goals and ambitions. It enables you to prioritise these aims, improving the chances of you achieving more of them.
By seeing your financial future in black and white, you can make genuinely transformative decisions about your life.
Here’s a simple example.
Rachel received an offer of £1 million for her business. However, she believed that her business was worth £1.25 million, so she worked for another five years in her company until she achieved that sale price.
Claire also received an offer of £1 million for her business. She worked with us and we created a cashflow plan that showed that Claire could achieve her goal of retiring now, travelling the world, and maintaining the lifestyle she wanted, all without the risk of running out of money.
Claire sold her business straight away, safe in the knowledge that she’d be financially secure for the rest of her life, as demonstrated by her cashflow model.
If you know how much is “enough” to reach your goals, you can make better decisions.
2 other ways cashflow modelling can help you
As well as helping you to see a clearer picture of your future, there are two other ways cashflow planning can benefit you.
- Helps to determine the level of risk to take
Determining how much risk you’re prepared to take can be something of a subjective question. Often, it simply boils down to the psychological relationship you have with risk. It can be difficult to quantify.
But what if that level of risk is too low to give you a realistic chance of meeting your objectives? Or what if you don’t need to take as much risk as you’re prepared to in order to fulfil your ambitions?
Cashflow planning helps to determine the return you need on your investments and savings to meet your goals over a given period. It shows you how likely you are to achieve your aims or whether you need to consider trade-offs, such as saving a little more, changing investment risk, or altering your time horizons.
- It helps you identify the risks that could prevent you reaching your goals
No one knows what is around the corner. There are lots of unexpected events that could delay your progress towards your goals, including:
- Ill health
- Loss of employment
- The death of a loved one
- Changes to rules around taxation or pensions
- Rises in the cost of living
- Market and investment volatility.
Understanding these risks can help you to plan.
For example, a period of ill health might mean your income falls, and consequently you can’t save as much into your pension. Your cashflow plan would show how this could affect your future income, and that mitigating these risks – for example, through income protection – could protect your progress towards your goals.
We can also make assumptions about potential future outcomes that could affect your plan.
Right now, as an example, we can model a cashflow plan that considers a much higher inflation rate than has been the norm. This will show how persistent inflation might affect your income and expenditure, and what changes you might need to make now so you can maintain your desired lifestyle if it costs more in the future.
Planning for these risks does not make them more likely to happen – it just means you are better prepared.
Get in touch
Cashflow planning is an invaluable part of creating a financial plan that helps you to achieve your goals.
To find out more, or if you have any queries regarding your financial planning, please get in touch with us.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.