Lifelong Cash Flow Modelling… for businesses?
There’s no such thing, right?
OK, so it’s partly right! Truth® is a cashflow modelling tool for financial advisers, and their private clients. It helps the client to visualise their financial future, and the adviser to justify the advice they’re giving.
But when a business forms part of an individual’s financial plans, and decisions about the disposal of the business start to impact on their retirement, that’s when cashflow modelling comes to the fore! Financial planning for business owners doesn’t need to be any different to financial planning for luxury car owners…
Asset rich, cash poor(er)
I recently helped one of our planning clients with the following case. The client was a business owner who held an 80% share in a £2m business, from which they were taking dividends. They had £500k in their GIA, and wanted to use this to fund their retirement, after giving the business away to their son.
The client thought there would be no problem at all – they would phase out their dividends, pass on the business, and retire on their GIA and (very modest) old group pension. They didn’t go to their IFA for advice, but more for validation. They wanted to be told they were right. But they weren’t!
This is a Truth® Cashflow Statement. It shows the client’s liquid capital position throughout their life, and whether they have enough money to realise their desired future lifestyle.
They do not!
In this chart, we can see that the client runs out of money at 89. This may not sound TOO bad, but for a client who was quietly certain that they had more than enough money to live out their lives (however long that might be) in the manner to which they’d become accustomed, it was something of a system shock.
What happened next was a little unexpected – the client actually opened up about his family history, telling the planner how his father had gifted his small carpentry business to him in the 70s. He’d ventured out into bespoke cabinet-making, and turned the small business into a significantly larger one, but wanted to repay the favour for his son, who’d been an apprentice in the business since leaving school. He also REALLY wanted to enjoy his retirement, after many years of hard manual work.
Fixing a hole…
There are many, many ways to “fix” a broken cashflow. Truth® provides the planner with an armoury of tools to do just that. Whether it’s spending less (or more), increasing investment return, retiring later, or releasing equity from the family home, practically any planning situation you can imagine can be realised in Truth®.
When you’re engaging in financial planning for business owners, the hole can often be filled (in a variety of ways) by their business. That could consist of increasing their dividends, making pension contributions to make use of remaining Lifetime Allowance, looking at increasing profit margins, or reconsidering their business succession plans…
We can look, for example, at producing more income. The client doesn’t WANT to sell the business, but how much capital would he need to generate at age 75 (when he intends to stop drawing dividends) in order to realise all of his retirement dreams?
The More Inflows Calculator tells us the magic number is £640k (£306k in 2017 terms). Not an unfeasible amount, considering his shareholding is worth £1.6m. But the client didn’t want to do that.
The Key Date Calculator tells us that, by retiring at 71 (rather than 60), the client could avoid running out of money. Somewhat unsurprisingly, they didn’t buy in to this idea either!
How about reducing their expenditure?
The Spend Less Calculator shows us that a reduction of £7,499 per month would be required in order to “fix” the cashflow. The client is keen not to compromise on their planned retirement lifestyle, and this figure is significantly higher than their annual expenditure at that point, but it’s good to know!
How about increasing investment return?
Truth®‘s Growth Calculator tells us that increasing capital growth on his GIA from 5% to 5.57% would also “fix” his cashflow. But he’s not prepared to expose himself to any more risk than he is already doing.
The middle way…
The beauty of Truth®‘s cash flow tools is that they all work in isolation, but can be used together. Selling the business for £300k on its own would solve the problem, so would getting an extra 0.5% return on their capital… but so would selling the business for a lower value, and increasing the investment return by less.
Financial planning for business owners is no different to planning for any other client – if anything, it presents a wealth of extra “solutions” for potential problems!
Our cashflow tools provided the planner with the opportunity to demonstrate solutions to the client “live” in the meeting. But the planner had a pretty good feeling that none of these would be acceptable. What they DID offer, however, was ideas.
The solution, in this case, was beautifully simple. The client was planning to stop working at 60, but continue to take dividends until age 75. By stopping their dividends four years early and, over the same period, phasing the sale of the business to their son for only a little more than the value of their dividends, they were generating capital which they could afford to retire on, without compromising either on their desired lifestyle in retirement or their desire to continue the family legacy of passing on the business for a nominal amount.
Not only does the son get the business for a small portion of its value, but this planning exercise leaves the client with an estate of £750k (two nil-rate bands). The client and his partner only have one child – it’s win-win for both client and son!
The beauty of a Truth® lifelong cashflow model is that it’s infinitely flexible. Our software suggests simple solutions, but also makes modelling incredibly complex ones very straightforward. Our tools can be used dynamically in front of clients, or solutions can be painstakingly prepared in advance. These solutions can then be presented to the client using our no-nonsense, easily comprehensible charts, either on screen or as a printed report.
Even better – we’ll help you to achieve this! Whether it’s crafting a bespoke solution that satisfies your client’s highly specific needs; producing a polished, branded report, or presenting the solution to a client, we’re on hand with the support and training you need.
Because planning is about more than just products, and cashflow modelling is about more than just software!