Cash-flow management is a concept that has been around for decades. However, it seems to be something of a ‘fair-weather friend’, in that while it is a focus during positive times, we sometimes forget about it during a downturn when there are always more important things to worry about.
This is ironic because it is usually during the harder times that investors and financial planning practices need it most.
For a business, neglecting cash flow can lead to insolvency, and personal cash flow is no different. Good cash-flow management helps a business to get through the tough times and flourish during the good times. This can be the same for your clients. Managing your clients’ cash flow can also do the same for your business.
For financial advisers operating in the current environment, clearly articulating a strong value proposition to existing and prospective clients is a challenging task. With ongoing discussion in the public domain about fees and commissions and what the client is getting in return, it is important for advisers to demonstrate that their expertise can effectively translate into reaching financial goals.
In this sense, effective cash-flow management strategies can become a key element of a financial planning practice’s value proposition.
For an adviser, the concept of cash-flow management is simple to articulate to clients for its massive potential impact on their ability to achieve financial independence. It is a simple process, but it can generate great returns, helping to teach the client important principles, such as the importance of establishing financial discipline and understanding the cash-flow patterns of their assets. It also teaches them how to:
- understand the cash-flow patterns of their liabilities;
- define their key financial goals;
- develop and implement a cash-flow system that works for them;
- track their investment income on an ongoing basis; and
- generate long-term and sustainable results.
Cash-flow management strategies can effectively become the centre of a financial planning practice, acting as the core of every client’s financial strategy. Not only does this give the adviser the ability to maintain a full view of each client’s position, importantly it allows the firm to link itself to each client, through this centralised system.
For a client, cash-flow management can open up a whole new world of opportunities. With levels of household debt at, what some say, are an all-time high, investors can soon find themselves in a vicious circle of incomings and outgoings, leaving nothing in the wealth accumulation bucket.
This issue of low savings and high debt also has significant implications for Australians planning for retirement. We have already heard the stories about the many pre-retirees who, due to the fall in financial markets, will find themselves with inadequate cash to fund their lifestyle after leaving the workforce.
There have also been trends of pre-retirees using their superannuation to pay down their mortgage as they approach the end of their working lives, leaving even less in the kitty for when the employment income dries up.
The concern about having empty pockets during retirement is causing many investors to reconsider their current spending patterns. This opens up an opportunity for the smart financial adviser.
Further to this, cash-flow management strategies can play a critical role in the structuring and ongoing management of a self-managed super fund (SMSF). With the level of administration and reporting required for an SMSF, along with the strict legislative conditions a trustee is required to follow, an effective cash-flow management solution can make these tasks easier and more effective.
For example, the professionals involved in managing and investing an SMSF can be many, including stockbrokers, solicitors, accountants, administrators and auditors. With funds flowing from and to these groups, into a variety of investments, a cash-flow hub can become the centre of that process. It can also assist with taxation planning and tax reporting.
Regardless of how a client is investing or whether they are active investors at all, cash-flow management has a firm place in the heart of any personal budget.
Setting a personal budget may be step one in the minds of those working in the financial advice industry, but if you ask a group of people on the street whether they have one, many will say no. Further than that, even for those who do have one, few will be maximising the full potential of this opportunity to grow wealth.
For a client who has not considered a cash-flow management strategy before, or could manage the one they have more effectively, demonstrating how this can work and the benefits it can provide immediately gives a clear picture of how working with you, as their adviser, is going to bring financial benefit.
We all know that money, especially the prospect of not having enough of it, can be an extremely emotional subject. This has been heightened during the recent downturn.
For any new or even existing client, asking them to write down what their financial goals are and when they hope to achieve them, can help bring home the reality that they have to make changes to get there. Cash-flow management helps to provide a workable solution.
There is an old saying in the world of finance that if a person gives you the management of their cash, then you have their hearts. I believe cash-flow management strategies can provide a key to an investor’s heart, from which advisers can benefit.
Peter Forrest is associate director of Macquarie Adviser Services.
