From Adviser Guide:
Q: What is cash flow modelling and who is it for?
Cash flow modelling is one of the ways advisers can help clients make more sense of where their money is coming from and going to over their lifetime.
Cash flow modelling (CFM) is a part of the financial planning process for many advisers, who use modelling software as a tool to help clients better visualise their financial future. However, it is likely there are many advisers who engage in a form of cash flow modelling without any specific modelling software.
Financial adviser Michael Hunt, partner at Greycoat Financial Services, said: “From a financial planning perspective we see it as a way of presenting a clients current financial position in graphical form and seeing how it might unfold in the future based on the information we have today.
“CFM can be used for general financial planning, or specific transactional advice such as life cover shortfall or pension shortfall based on today’s information,” he explains, adding that it can be particularly useful for those who have an immediate financial shortfall they wish to address.
As well as the tangible illustration it provides for advisers to demonstrate the client’s situation, modelling can kick off a number of discussions between adviser and client, as Richard Allum, managing director of Paraplan Plus, explains.
Mr Allum says: “It is a means of helping to chart a client’s future cash flow position in order to help establish their ability to achieve their lifestyle objectives, their capacity for loss and risk, and then start to build a financial plan.”
“It’s one way for advisers to help bring their clients’ money to life, illustrate a projected financial situation and establish a basis for further financial advice.”
But don’t just write cash flow modelling off as an overly simplistic or dogmatic system – nor is it just for individuals with little idea of their financial wants, as Sandy Robertson, managing director of Acumen Financial Planning, explains: “It is a well-established accounting discipline grounded in modelling the future for corporates and can be at any level – company, subsidiary, department and is particularly useful for project evaluation where projects are competing for capital if cash (as is usually the case) is a limiting factor.”
Mr Robertson adds that while the process can be useful for a wide variety of possible clients – “any corporate, government department, charity, university, household and any individual” – he warns against using modelling in isolation.
“[Cash flow modelling should not be] the sole consideration in any decision. Cash flow is one of the things to consider, but not the only one.”
CFM should never be used as the sole means of providing financial advice, agrees Mr Allum: “It should be used as part of a financial planning and review process, in conjunction with other tools such as attitude to risk questionnaires and asset allocation tools, and, of course, the adviser’s knowledge, experience and analysis.”
As for how to charge for the service, some IFA businesses find it is better to charge per cash flow projection, while others build it into the overall cost and include it in a fee. Charging a lot for running a model can be a risky strategy as it may affect your client relationships, but it all comes down to what value a cash flow projection adds to the client proposition.