10 scary cash flow mistakes to avoid this Halloween
Cash flow modelling can be a fantastic tool – if used correctly. With Halloween coming up, here are 10 scary cash flow mistakes that you should avoid
In recent years, Halloween has become a big deal in the UK. Brits now spend an eye-watering £400 million on the spooky holiday, on everything from decorating the house to sweet treats.
So, with Halloween just around the corner, we’ve highlighted ten scary cash flow mistakes you should avoid this October 31…
1. Using outrageous assumptions
When you use cash flow modelling, the outputs are only as good as your inputs. So, you need to be sure that you’re using reasonable and credible assumptions for inflation and growth.
Remember that the tool is going to inform important decisions about a client’s quality of life. Assuming that their investments will return 12% a year could leave them high and dry when it comes to retirement.
Similarly, it’s vital that you use a reasonable assumption for inflation. Yes, CPI inflation in the UK may only be 0.2% now, but assuming that will remain the case for the next 20, 30 or 40 years is likely to significantly underestimate what a client needs in later life.
2. Underestimating a client’s expenditure
As with the point above, accurate input is vital to ensuring accurate output when it comes to cash flow modelling.
For example, if you don’t understand the difference between net and gross inputs when you use a cash flow tool, and the impact this will have on outcomes, you’re going to make mistakes.
Similarly, if you assume that clients save what they don’t spend, you could overestimate the value of their wealth in the future.
Make sure you understand exactly what a client’s expenditure is and input this accordingly.
3. Failing to stress test
One of the scariest cash flow mistakes you can make is to fail to incorporate catastrophes or stress testing.
One of the huge benefits of a cash flow tool is that you can use it to test a range of ‘what if?’ scenarios. From stock market crashes to death or illness, it’s a way of ensuring that a client will have ‘enough’ even if events conspire against them.
Stress testing is a great way of explaining any contingency planning you have provided, such as: “What would have happened if we’d adopted the original aggressive risk profile? How would previous investment portfolios have been impacted?”
By demonstrating this contingency planning, you put both a monetary and an emotional value on your service.
For example, we’ve previously looked at how using cash flow modelling might help you give clients the confidence that they don’t have to delay their retirement, even in the light of the coronavirus pandemic.
It’s not just macroeconomic events that you can stress test. Cash flow modelling is also becoming a key tool in protection planning, as you can show clients what would happen to their wealth in the event of death or serious illness. It helps you to ensure a client receives the right capital injection when they need one.
4. Only incorporating half a story
Clients have unique plans for their future. From helping kids go to university to grand retirement dreams, their aims and ambitions are what drives cash flow modelling outcomes.
It’s vital that you understand exactly what a client wants and consider the bigger picture.
A story we often share is of a financial planning client whose goal was to buy a holiday home abroad. While the plan enabled the client to save enough to buy their dream home, none of the associated costs of running it or travelling to it were considered. Consequently, the client was rarely able to use
5. Not understanding what you’re doing
One of the most common objections we see to using cash flow modelling is that ‘it’s too complicated’ and ‘too difficult to use’. (There’s more about this and other myths in our free downloadable guide).
The truth is that cash flow modelling is surprisingly simple to use. Indeed, we recently shared seven tips from the experts to nailing cash flow first time.
Of course, if you don’t know what you’re doing, then you’re probably not going to get the best from the system. If you are struggling with your existing tool or not getting the right support, get in touch and we can help.
6. Disregarding the impact of tax
The best cash flow modelling tools such as i4C allow you to factor in the impact of taxes on your client’s financial position. This will include the savings that could be made and the implications of tax (for example, Inheritance Tax).
Failing to take the impact of tax into consideration when modelling a client’s future finances is a mistake you want to avoid.
The best financial planners are constantly adding value.
This might be by improving how investments are structured, through efficient withdrawal strategies, or by outlining Inheritance Tax (IHT) plans.
7. Failing to consider alternatives
If you don’t use cash flow modelling, how do you justify a recommendation to a client? How do you prove it might be better to do nothing than do something? And how do you prove the value of your advice?
For example, imagine you had a client who wanted to sell a business. You can compare selling in ten years for an assumed amount against selling earlier for a lower amount but from the client not having to work. It helps a client to understand the compromises.
8. Failing to regularly review
Using cash flow modelling once can help a client to visualise their financial future. However, as 2020 has taught us, things can change quickly.
There are countless reasons a client might need to update their plan. From births, marriages, and deaths, to new jobs, redundancy, illness, and external factors, it’s vital that you review a client’s plan often.
If you don’t, you might be providing them with a false sense of security.
9. Adding trusts as a ‘liquid’ asset
Here’s a more technical ‘scary mistake’ that we’ve seen in the past.
Be careful not to add trusts to a cash flow forecast as a liquid asset. Doing so can inflate the cash flow and accessible liquid assets. Whereas, in reality, a client may only be able to draw a limited income from the trust but not access the capital.
10. Relying too heavily on cash flow modelling
Of course, we believe that cash flow modelling is a vital tool for all financial planners. There are loads of benefits, from engaging clients with the advice process to being able to demonstrate to compliance that your advice is robust.
However, it’s important to remember that cash flow modelling is a tool, and that it isn’t the be-all and end-all of advice. It’s not there to predict what will happen in the future; it’s there to help a client to prepare.
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If you’re thinking about incorporating i4C technology into your advice process, read this article about why your business might need cash flow now.
This article was written by Rob Tedder, Client Cashflow Solutions Manager at i4C.