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From Adviser Guide: Cash Flow Modelling

Q: How accurate is cash flow modelling?

Advisers agree that the results are never 100% accurate and deteriorate over time.

By Oliver Haill | Published Sep 20, 2012 | comments

In order to illustrate the possibilities the future holds, cash flow models must include a range of various assumptions, such as projections for varying degrees of inflation.

These variables could differ, say between 1, 2 and 4 per cent per year and, while they give clients an idea about the wide range of possible outcomes, the difference to the clients projected wealth might be so broad as to be almost meaningless.

As such, jokes independent adviser Michael Hunt, partner at Greycoat Financial Services, advisers might explain to clients that the process “is not worth the paper its written on”.

“A little facetious maybe, but the output is only as good as the input and the assumptions made. Cash flow modelling provides a snapshot of where clients are today and if they keep doing what they are doing and the assumptions made actually happen then this is what their financial position will be in X years time – but it won’t happen like that,” he explains.

This doesn’t mean it isn’t worth using, argues Richard Allum, managing director of Paraplan Plus: “Cash flow modelling can never be 100 per cent accurate but it provides a very useful guide. It is an ongoing process and the forecast needs to be monitored, reviewed and refined on a regular basis.

“It’s possible to model for different scenarios caused by future events and this should be part of helping to establish the client’s capacity for loss and risk.”

As the accuracy of the procedure deteriorates as the time line increases, perhaps cash flow modelling provides a good reason for clients to keep in contact with advisers and perhaps prompting more business. Sandy Robertson, managing director of Acumen Financial Planning, says it should never be considered a one off: “It should be regularly updated – every year ideally but certainly every couple of years.”

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