Cash-flow forecasting is all about you — your goals, ambitions, objectives and aspirations. It is not about financial products in their own right, but rather what role they play in your financial plan.
Cash-flow forecasting helps provide clarity, giving a picture of your finances (both now and in the future) by assessing your current and forecast wealth, alongside income and expenditure.
This detailed picture of your assets includes investments, liabilities, income and expenditure. Together they are projected forward, year by year, using calculated rates of growth, inflation, salary rises and interest rates.
Cash-flow forecasting can help you understand what you have to do to realise your short-term goals, such as paying university fees or buying the holiday home you always promised yourself. And you can make sure you are always on track for those medium-term goals, perhaps a wedding or giving your children/grandchildren a start on the property ladder. Most importantly, you can focus on long-term goals, allowing you to create complete financial independence.
And cash-flow forecasting can show you what you may need to do to reach your goals, even if disaster hits.
A bespoke, calculated and reasoned lifetime cash-flow forecast enables you to make the decisions today that will ultimately determine your future financial position. Understanding the effects of today’s decisions empowers you to achieve your goals in the future.
Where cash-flow modelling becomes particularly useful is the analysis of different scenarios based on decisions you may make — this could be lifestyle choices or perhaps investment decisions. By matching your present and expected future liabilities with your income and capital, recommendations can be made to ensure you do not run out of money throughout your life. A lifetime cash-flow plan should enable you to:
- Produce a clear and detailed summary of your financial arrangements
- Define your family’s version of the good life and begin working towards it
- Work towards achieving and maintaining financial independence
- Plan to minimise your tax liabilities
- Produce an analysis of your personal expenditure, balancing your cash inflows and outflows
- Develop an investment strategy for your capital and surplus income in accordance with the risk/reward, flexibility and accessibility with which you are comfortable
- By ensuring your risk profile and capacity for loss are accurately assessed, create an appropriate asset-allocation strategy for your existing investments. You may need to take more risk to reach your goals, but you may find you can take less risk, too
- Become aware of the tax issues that are likely to arise on your own death and that of your partner.
To implement a detailed plan that outlines how to deliver your financial future, communication is vital. To ensure that, over time, you achieve your lifestyle goals, it is important to regularly review your financial plan and make any necessary amendments if there is a change in your personal circumstances, goals or indeed the world economy. As a result you will feel more financially secure and independent.
Adrian Duke-Cohan is director of Dukes IFA, which provides bespoke independent financial advice, 0203 824 2242, adrian@dukesifa.co.uk, dukesifa.co.uk
