Cashflow forecast growth rates
EmmaV
Member
Hi
We currently use Cashcalc for Cashflow forecasting, which means we need to add in a growth rate for the projections.
There is a "healthy" debate in the office about what rates we should use, inflation plus X%, variable growth based on the returns for the relevant investment sector over a set timeframe, a set rate of X%.
We are also debating the inflation rate we actually use.
Anyone have any thoughts or rates that they have agreed upon?
Thanks
Comments
We use inflation of 2.50%, but it doesn't matter 2-3% as long as you are clear what you have assumed.
On the growth figures, we do one on the fixed and one on the variable at the risk rate. Then do a market Crash on the fixed (already factored into the variable)
We also take the charges out on the fixed rate of growth and say e.g. 3% after charges.
I think @Redawg31 is right.
Not sure it really matters as long as your assumptions are (common) sensible, you are clear on what they are and you are aware of the limitations the approach you choose poses.
For the record, we use a fixed rate which is broken down by risk profile based on data provided by Moodys and Morningstar for expected long term returns.
Whilst these averages will factor in previous market events - we still do market crash analysis based on variance figures provided by the same research houses. This is therefore somewhat of a doomsday position and could be seen as over-egging the cake; but we are aware of this limitation and factor it into advice research.
You can get the last 10 year RPI and CPI figures off of FE. I have averaged the output from both of these data sets and arrived at the figure that we use for our clients assumed inflation rate. For the growth rates, I understand that the FCA have produced some expected returns for various asset classes. I plan to build a spreadsheet using those figures, match them to the advisers portfolio and then use those numbers.
I think as you have all said, providing you have a documented evidence to support how and why you have arrived at the figures you use, you should be okay.
I also use cash calc and like to use the IA returns as well for contract against fixed returns.
Or take background inflation out and just use real rates which of course will result in some asset classes such as cash incurring capital loss; doesn't the approach really depend on what you want to express not of course forgetting the capacity of the consumer.
In a previous company we assumed 2.5% inflation, and a growth rate commensurate with the risk rating of the client, which ranged from 2% at the bottom end to 8% at the top end.
Of course it was completely meaningless, not helped by the fact that I was told to remove the stress tests as they weren't deemed 'realistic'. I railed against this constantly but at the end of the day, I was employed...
I think the key with it especially when showing the impact on cashflows is the link to inflation in relation to the growth of assets. Our forecasts for cash in Voyant are 1.5% below inflation and for Pensions/Investments we go 1.5% above inflation after fees (which we appreciate is cautious and we do this on purpose). We can step up and down growth and show various scenarios anyway so its more the correlation for us to inflation and vs other assets etc. We document all our sources into one document and meet regularly to update them and give reasoning. Same for all assumptions throughout the cashflow system for example Market Crash scenarios. We felt a standard All Share Market crash was a little too harsh so we looked at exactly what our certain portfolios did and what a typical investor in a global diversified portfolio may go through when Credit Crunch hit and used these crash figures rather than just a standard FTSE All Share.
Its out of date but there is a useful IFP assumptions paper (with links to sources) which may help in determining things for you and this is attached.
Many banks just reduced basic deposit rates from 0.25% to 0.20" some are 0.10%, CPI toSeptember 2019 was 1.7% so all is well?
[https://ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2019]
Lies, dammed lies and statistics, forecast RPI is plus 3% rising to over 4% by 2024 Q1
[https://statista.com/statistics/374890/retail-price-index-rpi-forecast-united-kingdom-uk/]"https://statista.com/statistics/374890/retail-price-index-rpi-forecast-united-kingdom-uk/")
Using CashCalc at my previous place of employment we had a standard set of rules for inflation and growth.
Inflation was 2% and the growth rates applied depended on the equity content/risk profile of the particular product being forecast.
We would then also 'stress test' it by duplicating the scenario but dropping the growth by an appropriate % i.e. growth of 5% dropped by 2%, to show the effect of potential market dips. I think you can also do a market crash simulator on CashCalc too if I remember correctly.
I put together the attached document a while ago which summarises the assumptions we use for growth/other variables.
Some of it is specific to Voyant (the cash flow software we use), but hopefully, the growth rates apply to your question for cash calc.
Thanks Chris, interesting reading. It is important that assumptions are backed by some evidence.