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Pros and cons of cash flow modelling

This article is part of
Guide to Cash Flow Modelling

Danny Cox, head of financial planning at Bristol-based Hargreaves Lansdown, says the assumed rates of growth, income, tax and so on that are used to form the basis of any cash flow modelling exercise will always ultimately be wrong.

He says therefore regular reviews and reassessments are required to ensure the client remains on track.

Mr Cox says: “This is a positive not a negative and clients should engage with their financial planning regularly whether they use cash flow or not.”

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Rebecca Taylor, president of the Institute of Financial Planning, says nearly all decisions are based on what is contained within the cash flow, from how much to save and spend, to how funds should be invested to achieve the required return.

With cash flow modelling, Ms Taylor says there is a lot that needs to be managed.

She says: “This is namely the assumptions that are made in the plan - and there are a lot. There are the usual assumptions such as inflation and investment returns, but of course there are assumptions on lifestyle and spending.

“The client needs to be fully involved in the process and understand that there are variables. Assumptions are necessary though as the alternative is to base advice on guesswork without any planning and I know which option I would prefer.”

David Crozier, director of County Down-based IFA Navigator Financial Planning, agreed that unless handled with care, a cash flow model can give a spurious sense of accuracy.

He says: “They are only as good as the assumptions made, and they must be reviewed.”

Ultimately, David Gibson, director of County Londonderry-based Gibson Financial Planning, says clients cannot experience true financial planning without cash flow modelling.

But he says the main disadvantage with cash flow modelling is that a cash flow model is only as good as the information available and it must be kept updated with the inevitable changes to a client’s circumstances.

Therefore unless an adviser has an ongoing flow of communication with a client, the plan produced by cash flow modelling could come of the rails.