How Cash Flow Modelling can help with the Cost of Living Crisis
Richard Howes
14 September 2022According to the Office for National Statistics, there has been a steady increase in the number of adults reporting an increase in the cost of living over the since November 2021. In the most recent Opinions and Lifestyle Survey (OPN) data, 87% of adults reported their cost of living had increased compared with 62% in November 2021.
One area that Paradigm think could help both advisers and clients is cash flow modelling. In its simplest form, cash flow modelling is the process of assessing both current and forecasted wealth, along with inflows (income) and outflows (expenditure), to enable a picture to be created of an individual’s finances both currently and in the future.
Cash flow modelling allows a client to reflect on their current financial position relative to a preferred position, against their personal aspirations and the reality of their income and costings currently. It is a detailed picture of assets, investments, debts, income and expenditure projected forward year by year using assumed rates of growth, income, inflation and interest rates.
But doesn’t an affordability calculation suffice for the purpose of a client buying a house? Yes, if that’s your only relationship with your client, and you want to take a snapshot of their finances on a particular day only.
However, if you are looking for a deeper long term relationship with a client, an affordability calculation only deals in the here and now and does not take into account a change in circumstances, such as a change of job with a higher or lower salary, a partner doing less or more hours, the birth of a child, sickness, long term illness etc., where you can help them plan. Yes, it adds in an extra layer of detail with a stress rate, but there is so much more to consider as your clients move through their lives.
A cash flow model can enable you to build a clear and detailed summary of your clients financial arrangements, ensure adequate provision is made for any financial consequences of death and disablement, potentially minimize tax liabilities, and produce an analysis of personal expenditure balancing cash inflows and desired cash outflows, as well as estimating future cash flow against a set of realistic assumptions.
By engaging with your client through this type of model you can help them to build a picture of cost against their new mortgage payments, taking into account all the costings affecting them now and in the future by using your knowledge and referencing their current circumstances against their thoughts and aspirations.
Who would have thought a year ago that inflation would be 10%, and energy bills would have risen to a level unprecedented and are only being capped by government intervention?
By using a cash flow system whilst you may not have put in figures as high as that, it would be fair to suggest we knew that energy bills were going to rise, so your client would have an expectation and understanding of where their finances could be now and where they are heading. More importantly, they would be engaged with you as their adviser and not be looking at other avenues for help which could affect your advice in situ, such as prearotection and general insurance policies.
With the cost of living crisis, for the first time in perhaps 10 years, advisers are now having to explain rising interest rates against mortgage payments, which is set to continue in both the short and long term. By having a cash flow plan with your clients, this would be a more manageable conversation as it could be part of an annual review and not one where there are surprises. Indeed, such a conversation happening near the end of the fixed rate term can encourage trust and help an adviser to form a genuine client partnership.
As an adviser, you will almost certainly have clients who wish to become and remain financially well organised, who have lifetime goals and want to control their liabilities. If you do, then cash flow modelling is the system and process that can help both them and you.
So, how can you as an adviser start with cash flow planning? At Paradigm, we have relationships with the leading Cash Flow systems who can support you with this. As an example, we have EVPro on our panel as a strategic partner, you can find out more about their service here. We are pleased to be able to offer Paradigm members an exclusive 10% discount. Click here to find out more about their proposition. Our Relationship Managers can work with you to assimilate and understand the types of clients who could, in the short term, benefit from this, for example high net worth clients or clients with BTL portfolios.
They have solutions where cash flow systems can dovetail into managing your data which allows it to become a tangible asset of your business, as well as incorporating it into areas such as existing client login areas.
Cash flow modelling is an area that can drive deeper relationships with clients, as well as adding real value for your clients along with an increased revenue stream, please give us a call to discuss this further.
