The benefits of cash flow analysis

Troy A. Collins, ADFP, has clients who earn above-average incomes but still can’t get ahead financially. Not only are they not saving or investing, but they’ve often racked up considerable debt. So his first step is to analyze the client’s cash flow, which he believes is a critical part of providing true strategic advice.

“We’ve been able to turn this around in a relatively short period of time and position them to generate surplus cash flow immediately,” said Collins, a 20-year MDRT member from Toowong, Queensland, Australia. The cash flow analysis also resulted in quicker debt reduction, larger wealth accumulation, and greater lifestyle choices for the client and their family. 

There are different strategies to analyze a client’s cash flow: an ongoing cash flow analysis and lifetime cash flow forecasting. Advisors who do cash flow analysis often do a mixture of the two.

Collins tracks cash flow on a monthly basis, and also does lifetime forecasting. He uses a detailed expenditure spreadsheet and goals matrix, and an online wealth portal. The online portal links the client’s bank and transaction accounts, which then data-feed up to six months of transaction history for Collins’ team to review.

“With these tools, we then break the data down to fixed and discretionary expenditure, plus financial allocation to future goals,” he said.

On an ongoing basis, they track the client’s actual expenses every month against projected expenses, with the goal of having surplus cash flow to reduce debt and increase wealth accumulation.

Clients receive a monthly cash flow and asset management report that illustrates how they are tracking to plan. All the client needs to manage are their discretionary expenses.

Collins recommends his clients keep a separate discretionary account for items such as groceries, dining out, clothing, entertainment and other activities. “By having these funds isolated, they can better manage cash flow and lifestyle, then systematize the rest, including bills, loan commitments and investing,” he said.

Monthly tracking is critical to Collins. His wealth portal feeds the data directly from the client’s bank accounts, so they’re never more than 30 days behind. He also meets with clients every six months for a progress meeting, and then annually for a strategy meeting.

See more about cash flow analysis in the November/December Round the Table cover story