Financial Advisors create financial plans for clients regularly. To do this effectively, they invest time and effort to understand each client’s financial situation. What are their goals, and what is their risk tolerance and capacity? Once they have this information, they develop financial plans to help the client reach those goals.
Accurate cash flow forecasts provide a powerful framework for Advisors to visualize potential outcomes and develop proactive financial plans. By understanding the client’s financial situation, Advisors can help clients tackle the complexities of modern finance and achieve their financial goals.
This blog post discusses the importance of projected cash flow in financial planning and the value of using a structured cash flow projection template.
Main takeaways from this article:
- Cash flow projections are essential for understanding a client’s current financial health and predicting potential outcomes.
- Cash flow projection templates enable Advisors to present complex financial information clearly and concisely.
- By incorporating scenario analysis, Advisors can help clients navigate potential risks and make informed decisions.
- Snap Projections offers a feature-rich and user-friendly platform for creating interactive and customizable cash flow projections.
What is cash flow projection?
Cash flow projection refers to the process of estimating the anticipated inflow and outflow of funds for an individual or entity over a specific period. It involves forecasting future income sources, projecting anticipated expenses, and determining the resulting net cash flow.
Cash flow projection vs. cash flow forecast
While the two terms are often used interchangeably, there is a subtle distinction between them:
- A cash flow projection typically refers to a more general estimation of future cash flows, often based on historical trends and current market conditions.
- A cash flow forecast usually involves a more detailed and specific prediction of future cash flows, often incorporating more intricate assumptions and incorporating various scenarios.
Why cash flow projections are essential for Advisors
Cash flow projections are integral to holistic financial planning. They provide valuable insights into a client’s current financial situation by not just considering incoming cash but also analyzing cash outflow patterns, which helps in:
Enhancing financial planning accuracy
By accurately predicting future cash flows, Advisors can develop more realistic and effective financial plans. This includes setting realistic retirement goals, determining appropriate investment strategies, and identifying potential areas for improvement.
Aligning projections with client objectives
Cash flow projections help align financial plans with specific client objectives, including early retirement, funding education, or purchasing a property. By analyzing cash flow dynamics, Advisors can determine the feasibility of these goals and make necessary adjustments.
Utilizing projections for scenario analysis
Using cash flow projections, Financial Advisors can conduct “what-if” analyses by exploring different scenarios, such as market downturns, changes in income, or unexpected expenses. This helps clients to understand the potential impact of various events on their financial well-being and make informed decisions accordingly.
Strengthening client relationships through engagement
The process of developing and reviewing cash flow projections provides an opportunity for meaningful engagement with clients. By discussing their financial situation and future goals, Advisors can build trust and strengthen their client relationships.
What is a cash flow projection template?
A cash flow projection template is a structured framework that outlines the key components of a cash flow projection. It includes sections for income sources, expenses, and net cash flow, allowing for systematic data entry and analysis.
Key elements of a cash flow projection template
A comprehensive cash flow projection template should include the following key elements:
- Income sources: This section should encompass all sources of income, including employment income, investment income (RRSP/RRIF/TFSA/LIRA withdrawals, dividends, interest, capital gains), rental income, pension income (DBPP/DCPP), and government benefits (CPP/QPP, GIS, OAS).
- Expenses: This section should include all types of expenses, such as housing costs (mortgage payments, rent, property taxes), utilities, transportation, food, healthcare, education, entertainment, and discretionary spending.
- Net cash flow: This represents the difference between total cash inflows and total cash outflows. A positive net cash flow indicates a surplus, while a negative net cash flow indicates a deficit.
- Forecasted period: This specifies the timeframe for which the cash flow projection is being made, which could range from a few months and years to several decades.
Types of templates
There are various types of cash flow projection templates available, each with its own advantages and disadvantages:
Basic spreadsheets
Simple spreadsheets created in programs like Microsoft Excel or Google Sheets can be used to create basic cash flow projections.
- Pros:
- No-cost to start, making them a readily available option
- Cons:
- Time consuming to build and personalize the projections
- Do not produce client-friendly reports
- Limited in terms of advanced features and analysis capabilities
- Easy to make mistakes as there are no guardrails for calculation and assumption verification
Advanced software projections
Specialized financial planning software offers sophisticated cash flow projection capabilities, including built-in formulas, and advanced scenario analysis.
- Pros:
- Streamlined cash flow and data entry with automated calculations
- Robust, client-friendly reporting features
- Transparent and accurate calculations
- Cons:
- Can be more expensive than no-cost, basic spreadsheets
Cash flow forecasting template
A cash flow forecasting template helps advisors evaluate a client’s financial situation by incorporating various scenarios and analyzing the potential impact of market conditions and life events.
In Snap Projections, Advisors can use the Stress Testing feature to achieve similar insights, applying historical or randomized inflation rates and investment returns to assess and mitigate potential risks. This approach offers a nuanced understanding of how different factors could affect a client’s financial outcomes, helping Advisors prepare their clients for unexpected changes.
Pros:
- Provides a comprehensive understanding of potential risks and how to plan for them
- Enables personalized financial advice through scenario analysis and comparison.
Cons:
- Requires accurate data inputs for meaningful results
- May require client education to ensure comprehension
Steps to utilize a cash flow projection template
To use a cash flow projection template effectively, follow the steps below. These steps will ensure that your projections are accurate and insightful.
1. Gather financial data
This is a crucial step that involves gathering financial information from the client and organizing it. This information includes:
- Income statements that detail employment income, investment income, and expected government benefits
- Expenses such as housing, utilities, transportation, food, healthcare, education, entertainment, debt repayment, and savings
- Tax returns and investment details
- Current asset and liability balances
2. Input data into the template
Once all the data is collected, the financial data is entered into the designated sections of the chosen cash flow projection template. Accurate and timely data entry is essential for the reliability of the subsequent analysis.
3. Adapt the template for client-specific goals
The template should be customized to align with each client’s unique financial objectives. This may involve adjusting assumptions about future income growth, incorporating specific retirement goals, or factoring in planned life events such as education expenses or the purchase of a new home.
4. Calculate net cash flow
The template should automatically calculate the net cash flow by subtracting total expenses from total income. This calculation provides a clear picture of the client’s current financial health, indicating whether they are generating a surplus or experiencing a deficit.
5. Incorporate forecasting elements
This involves projecting future income and expenses based on various assumptions and market trends. It may involve considering factors such as inflation, interest rate changes, and potential investment returns.
6. Review and analyze the results
The generated projections must be carefully reviewed and analyzed to identify potential risks and opportunities.
Be sure to examine key metrics such as net worth, savings rate, and debt-to-income ratio to assess the client’s overall financial well-being. This information should be used to create a comprehensive financial plan that outlines the steps the client needs to take to achieve their financial goals.
7. Adjust for scenarios
To provide a comprehensive understanding of potential outcomes, Advisors can utilize the template to model various scenarios, like unexpected medical expenses, job loss, or market downturns. This allows clients to understand the potential impact of different events on their financial situation and develop appropriate contingency plans.
8. Present insights to clients
The findings from the cash flow projection analysis should be presented to the client clearly and concisely. The analysis should be tailored to the client’s financial situation and presented in an easy-to-understand format.
Consider using visual aids, such as charts, graphs, and other illustrations, which can help the client understand the key findings and implications of their current financial situation. The presentation should also include recommendations for managing cash flow and achieving financial goals.
9. Regularly update the template
The cash flow projection template should be regularly updated to reflect changes in the client’s financial circumstances, such as changes in income, expenses, or investment portfolio. This ongoing review and adjustment ensures that the financial plan remains relevant and effective over time.
Benefits of using a cash flow projection template
Cash flow projection templates offer many advantages for both Financial Advisors and clients, enhancing the financial planning process and improving overall outcomes.
For Financial Advisors:
- Increased efficiency: Streamlines the financial planning process by automating calculations and reducing manual data entry.
- Improved client engagement: Involves clients more actively in the financial planning process, building stronger client relationships and increasing client satisfaction.
- Enhanced accuracy: Reduces the risk of errors associated with manual calculations, ensuring more accurate and reliable financial forecasts.
- Enhanced professionalism: Demonstrates a high level of professionalism and expertise to clients, showcasing the Advisor’s commitment to providing comprehensive and personalized financial guidance.
- Business development: Can be used as a valuable tool for client acquisition and retention, showcasing the Advisor’s capabilities and differentiating their services.
And for their clients:
- Increased financial awareness: Provides a clear understanding of their current financial situation, including income, expenses, and net worth.
- Improved decision-making: Empowers clients to make informed financial decisions by visualizing the potential outcomes of different choices.
- Reduced financial stress: Helps clients identify and address potential financial risks and adopt strategies to achieve their financial goals with greater confidence. This provides clients with the peace of mind they need.
- Enhanced goal setting: Provides a framework for setting realistic and achievable financial goals, such as retirement planning, education savings, or debt reduction. When financial actions are directly tied to achieving desired goals, clients are much more likely to follow the plan.
- Improved communication with Advisors: Facilitates open and effective communication with their Financial Advisor, promoting a strong and collaborative relationship.
Why Snap Projections is a must-have for Advisors
Snap Projections empowers Financial Advisors with a powerful suite of features that streamline the financial planning process and enhance client engagement.
Key features
- Interactive projections: Allows Advisors to create dynamic and interactive cash flow projections that respond in real-time to changes in key assumptions, such as income, expenses, or investment returns. This interactive nature facilitates “what-if” scenarios and enables Advisors to explore the potential impact of different financial decisions with clients.
- Scenario comparisons: Instantly compare up to five financial scenarios on one page with customizable tables and charts, helping clients visualize their options over time.
- One-page summaries: Snap Projections automatically generates concise and easy-to-understand one-page summaries of complex financial projections. These summaries provide a clear and concise overview of key findings and recommendations, increasing client understanding and engagement.
- Stress testing: Apply historical or randomized inflation and investment returns to stress test projections, educating clients on risks, preparing for the unexpected, and providing peace of mind.
How Snap Projections supports Financial Advisors
Snap Projections guarantees simplified financial planning for Financial Advisors by automating calculations, streamlining data entry, and offering a user-friendly dashboard, which saves Advisors time. It also enhances client communication through interactive features and clear summaries, improving clients’ understanding of complex financial concepts.
The platform increases efficiency by automating time-consuming tasks, allowing Advisors to focus on strategic planning and client relationship building, ultimately giving them a competitive advantage.
Simplify financial planning with cash flow projections
Cash flow projections are an indispensable tool for Financial Advisors. By accurately forecasting income and expenses, Advisors can identify potential risks, develop proactive strategies, and guide clients toward achieving their financial goals.
While basic spreadsheets can be used, Snap Projections offers a superior solution for Canadian Financial Advisors. Its interactive features, customizable templates, and user-friendly dashboard streamline the planning process, enhance client engagement, and deliver impactful financial plans.
To learn how using Snap Projections can make a difference in cash flow projections and improve client experience, start your free trial today!
Frequently asked questions
Is there a cash flow template in Excel?
There are cash flow templates available in Excel. These templates provide a basic framework for tracking income, expenses, and net cash flow. However, they have limitations in terms of functionality, customization, and the ability to incorporate complex scenarios. They are typically very time consuming to create and use, and verifying the calculations can become difficult for Advisors.
How do you create a cash flow projection?
Follow the simple steps below and leverage a powerful platform like Snap Projections to create insightful cash flow projections that help clients achieve their financial goals:
- Collect financial information from the client, including income sources, expenses like loan payments, and current asset and liability balances.
- Enter the collected data into the chosen planning software template. Incorporate forecasting elements, such as inflation rates and expected income growth, to project future cash flows.
- Customize the template to align with the client’s specific financial goals and circumstances.
- The platform will calculate the net cash flow by subtracting total expenses from total income.
- Analyze the projections, identify potential risks and opportunities, and develop appropriate strategies.
- Present the findings to the client clearly and concisely, using visuals and easy-to-understand language.
