Cash flow modeling is the process of assessing your current and forecasted wealth, along with inflows and outflows, to create a picture of your finances both now and in the future.
It accounts for your assets, investments, debts, income and expenditure, as well as interest rates, inflation and growth. This provides a significant amount of insight into your financial well-being.
The common misconception is that it is only useful for those with accumulated wealth, to help them secure their position and make sensible decisions over the years. In most cases, it is arguably more beneficial for those with longer-term objectives, due to the inherent need for a structured financial future.
Not all retirement incomes are fixed, with many people having a variable portion of the income generated from assets and investments. When this is the case, it is vital to plan for all possible scenarios.
With a cash flow plan, it is easy to do this through simply adjusting future variables. This allows for individuals to explore the different routes that their future may take, and demonstrates their financial stability in each case.
A lifetime cash flow plan should address important ‘What if’ questions, such as:
- What if you lose your job?
- What if you have to give up work because of illness?
- What if you have to go into a care home later in life?
- What if you sold your business and retired early?
The plan must also:
- Plan to minimize tax liabilities
- Estimate future cash flow based on realistic assumptions
- Ensure adequate provision is made for the financial consequences of the death or disablement of yourself or your partner
A cash flow model is only as good as the information available, and updates must be made whenever there is a change in your personal circumstances. The more detailed you are, the easier it will be to closely predict your financial future.
If you are an individual that wishes to become, and remain, financially well organised, control tax liabilities and determine lifetime goals, then a cash flow plan is right for you.
If you are a business, then it’s better to contact a company who offers corporate services and can offer this for your company.