Mr Chicken, Meet Mr Egg

We’ve had a few clients recently who have asked for a projection of their finances over the future (what we call a Cashflow Forecast), but who we’ve struggled to get to commit.

In each instance the response to our gentle nagging has been along the lines of “I do want to go ahead with the forecast, I just need to make a few decisions first.”

The irony of this statement is that the cashflow forecast is a tool specifically designed to aid decision making. Let’s look at an example.

Bob and Linda had waved off their last child to employment. Bob still ran his business and Linda worked part time in a local school. Now that their overheads had greatly reduced, they wanted to do more things – travel, some charity work and sing more in the choir they are both involved with. What we used to term ‘retirement’!

Bob had been trying to sell the business for a while, but hadn’t received an offer at the value that he believed the business to be worth. He told us he’d get around to the cashflow exercise once he’d sold the business.

We finally managed to get them both to agree to the forecast, even though the business hadn’t sold. They completed our expenditure and asset questionnaire and we built the model of their finances over the next forty years. They came in for a meeting and we started off by making a few assumptions about their future – how much to spend on travel, forthcoming weddings of children and so forth.

There was also one very big assumption – how much the business would sell for.

We then forecast their future. Everything looked rosy. Using the proceeds from the business in the short term, old company pensions kicking in five years later and the State pension a few years after that, Bob and Linda could have the retirement they had hoped for. In fact, they had quite a bit more than they needed.

There was only one snag – they hadn’t sold the business, and so none of this could happen.

We then changed this major assumption by knocking 30% off the proceeds of the sale of the business. When we ran the forecast again, they still had enough.

We therefore suggested that Bob look at the business differently. Rather than asking “How much could I sell my business for”, surely a more relevant question should be “How much do I need to sell my business for?”

Bob put the business back on the market at the lower price and sold it 4 months later. They retired to the future they wanted, and could afford.

Financial planning is well named – it’s not just about pensions, tax and investments, it’s also about helping to make major life decisions.

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