Cashflow Modelling – The Basics and Why it Can Help You and Your Clients

In most divorce cases the consequence for one or both of the parties (aside from the emotional and practical concerns) will be financial anxiety.

Whilst very often the financial outlook for the couple was one of security and comfort, in the post-divorce world the stark realities of divorce mean that it will be difficult, if not impossible, to create two comfortable lifestyles.

More often than not, couples will be confronted by a fog of spreadsheets and forms which they will struggle to decipher and interpret in the context of visualising their future lifestyle.  However, there is another way…

Using technology to help divorcing couples reach a settlement

Increasingly, technology is being used to help divorcing couples reach a financial settlement that works for both parties (or, at least helps them better understand the financial implications of their predicament).

As financial planners, we have used cashflow modelling with our financial planning clients for many years. The software is very engaging (it can be as simple as ‘are you blue or are you red?’), highly illuminating and incredibly logical in helping people make good decisions with their money.

Essentially, a cashflow model is a summary of your client’s finances and it considers all assets, liabilities, income streams and expenditure. In the context of divorce matters, cashflow modelling can help to assess and identify the individual’s financial needs and make sure that any financial settlement which is reached can work for both parties.

It can be difficult for some clients to organise and gain a firm grasp of their finances, especially in circumstances where they have not been directly responsible for them during the marriage. Cashflow modelling can build a plan and help them to understand what type of settlement they require and what, realistically, they can achieve.

Whilst our reputation in the production of Pension Sharing Reports is widely known, we are increasingly being asked by lawyers to become involved early in divorce proceedings or to act as a ‘shadow’ expert to stress-test a proposed settlement.

This often helps with setting the direction of travel, illuminating many of the issues to be confronted, simplifying complex issues and ultimately helping to avoid conflict and thus increased emotions and costs. The cashflow modelling software that we use is integral to this process.

For those clients going through a divorce, building a realistic and sensible cashflow model will help them ascertain how much income they will need for their future.

In addition to considering day-to-day spending, it will also include additional requirements; for example, the income required during retirement, the cost of dependents (e.g. school fees), expenditure on holidays, and ad-hoc items such as buying a new car and major household repairs. Inflation, returns on investments, interest rates and taxes are also factored in.

Importantly, good cashflow modelling software will give a variety of outputs that will satisfy most needs, from visual and colourful graphical outputs to a deeper year-by-year analysis of the data.

Where and when cashflow modelling should be used

So, when should cashflow planning be introduced?

Our experience shows that cashflow modelling works well for mediating clients who are focused on a solution that works for both parties. On the flip side, it won’t work for every divorce settlement and is no ‘magic bullet’ in highly charged, confrontational cases.

Cashflow modelling could also work well where we have been asked to become a ‘shadow’ expert, perhaps specifically to test the practicalities of a proposed settlement. In cases where it demonstrates shortfalls or inconsistencies, the software can provide figures for suggested settlements that may be fairer as well as providing accompanying evidence.

The starting point is to understand what the real objectives are when sharing assets. This shifts the focus from ‘getting as much as possible’ to ‘getting what is needed’ which is a far more positive and rational objective.

Face-to-face meetings can also add enormous value and understanding as the modelling can be demonstrated live. The larger and more complex cases will be those where the added value of getting things rights will be significant and thus cashflow modelling can offer enormous value in these cases.

Some of the questions cashflow modelling can answer include:

  • What level of maintenance payments are required to meet future requirements?
  • How could maintenance be capitalised and how long will the capital last?
  • What will income in retirement from all assets look like?
  • How could the pensions best be shared to maximise income for both parties?

Cashflow modelling is also an essential tool for managing future expectations after the divorce.

Establishing a financial plan once a settlement has been reached will be essential in helping a client to understand their ‘new world’ and be aware of what actions they need to take in the future so as not to run out of money. Once established the cashflow model can be updated and reviewed at least annually.

By working with a financial planner, a lawyer or mediator can ensure that clients going through divorce are able to undergo as smooth a transition as possible to their new lives.

Whilst cashflow modelling is unlikely to replace the traditional Pension Sharing Report, it can provide a much broader view of the situation and can often illuminate areas where agreement or compromises can be made. This could speed up the divorce process, provide certainty and give clarity at a time when emotions are running high.

If you have clients that would benefit from this type of approach, please get in touch. Email or call us on 0118 987 6655.