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How to investigate and fix cash shortfalls

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How to tell if your results have a cash shortfall

If a scenario does not have enough funds to meet all expenses and goals, then the results will have a cash shortfall, and the strategy is not yet complete. You should review the results to understand when the shortfall occurs and how much it is, and then change and re-run the scenario (or a copy of it) until the shortfall is resolved.


StepDetails
1Solve your caseFor more see v1 How to solve a scenario to get results
2While Pathfinder is solving, if a shortfall occurs, the Solve event log will display red messages that say either 'Cash shortfall' or 'Insufficient funds'.

3Check the solve events to find out which report to check (either individual, SMSF, etc)

The solver errors will tell you the amount of the shortfall, what year it occurs in, and which report to check. If the shortfall occurs in many years, then you'll get a message for each year, but you just need to check the first one.

The message will tell you which report to check (the reports are at the 'Results > Detailed reports' step):

  • Reported in 'INDL: (individual name)\Cash flows, means you can check the report at the 'Results > Cash flows & Action items' step (or go to the 'Results > Detailed reports' step, and then choose 'Consolidated > Cash flows (detailed)':

  • Reported in 'SMSF: (SMSF name)\Transaction account' means, you can check the report at the 'Results > Detailed reports' step, then on the left menu, choose '(SMSF name) > Transaction account (detailed)':


4

Check the report for more details

  1. Go to the report you identified at the previous step
  2. If you are checking a 'Cash flows' report for an individual or couple, the report will have the following lines at the top of the report:
    1. Cash shortfall - this tells you the shortfall for a particular year
    2. Cash surplus - any surplus that can be used to reduce the shortfall
    3. Accumulated cash shortfall - This is the sum of all the previous years' shortfalls minus any cash surplus.
  3. If the lines are all zeros, then you may need to select the later years (on the top right of the report)

If you are checking an SMSF transaction account, the shortfall information will be at the end of the report:


5To download the results, you can use the 'Cash shortfall strategy paper' which just has reports to help resolve the shortfall

For more, see How to download results into a document (Strategy Paper, SOA (Statement of Advice) Foundation document, Strategy Comparison)

Tips for investigating shortfalls

Check input data for errors

The source of the issue may be in the input data, rather than an actual shortfall.

Thing to checkHow to check it
Check the 'Solve events' to see if the shortfall belongs to an individual or an entity
  1. Go to the Solve step, and check the 'Solver events' box underneath the Start solve button
  2. There will be red messages starting with 'Cash shortfall'
    1. You may need to check multiple pages (with the 1,2,3, etc buttons) to see all the messages 
  3. The message will be in red, and will be in a format like:
    1. 'Cash shortfall: <amount> in <year>. Reported in <report name>. e.g. Cash shortfall: 9,281.36 in year 2019. Reported in 'INDL: Jacob Demo\Cash flows'
    2. Insufficient funds in <SMSF member's> accumulation phase of <SMSF name>: <shortfall amount> in <year> e.g. Insufficient funds in Megan Demo's accumulation phase of 'New SMSF' (start of simulation): 77,250 in year 2022. Reported in 'SMSF: New SMSF\Transaction account (detailed)'.
  4. In the message, the text following  'Reported in:' should help you see the owner of the shortfall:
    1. INDL indicates it's an individual
    2. SUPER, SMSF, TRUST are self-explanatory
  5. Knowing who owns the shortfall can help you troubleshoot, however, note that root cause may not always belong to the owner.  For example, you may get a shortfall in an SMSF because Pathfinder is trying to draw a higher account-based pension in order to meet the individual's living expenses.
Check errors and warnings
  1. Go to the Results step (top menu), then the Solve sub-step
  2. Check the warnings in the Validate your input data section. These warnings may identify an issue with the data entry. e.g. if the loan is missing for the property purchase, have entered property expenses as both a percentage and dollar value, your SMSF has a Fixed interest account with a term of two or more years.
Check the income and expenses in the results

Go to the Results > Cash flows & Action items step, and in the cash flows report, read across each row and check that it is what you expect. In particular, check:

  1. Is any income missing?
  2. Is the income entered with the type 'Wages/Salary' before tax and not including the super guarantee?  If not, it should be.
  3. Are the any doubled up items? This is often caused by a value that is calculated by Pathfinder also being entered under cash flows. Some examples are:
      1. Loan repayments have been entered as an expense in the Cash flows section and with the loan. If this is the case, delete the expense in the cash flows section.
      2. Loan repayments have been entered as part of a property's 'Running expenses'.  If this is the case, deduct the repayments from the 'Running expenses' field (this field is on the property).
      3. Property running expenses have been entered under Cash flows > expenses and with the property. If this is the case, delete the expense in the cash flows section.
      4. The value for 'Annual living expenses' includes expenses that are also listed separately on the cash flows expenditure report e.g. Does the value for annual living expenses also include mortgage repayments?
      5. A credit card has been entered (as an Unsecured Loan) with the Balance containing credit limit, rather than the outstanding balance which is earning interest.  If the individual uses their credit card to pay for expenses, but pays it off on time and never pays interest, then the credit card should be excluded from the case. For more, see Unsecured loan
  4. An expense that should stop is occurring for the entire analysis (e.g. school fees should stop when the child is old enough). For more see, How to stop a value in the series builder.
  5. An income has been entered to start in the wrong year. e.g. too late. For more see How to increase or decrease a value in the series builder
  6. The frequency of an expense or income is incorrect. e.g. An annual expense has been entered as a weekly one. For more see How to use the series builder
If you need to make corrections, make the corrections, solve the case again and check the results.

For more see Entering Data in Pathfinder and v1 How to solve a scenario to get results.

Understand the nature of the shortfall

If your input data are correct, then work out if the shortfall is a one-off or happens in multiple years.


Thing to checkHow to check it
1

Check if the shortfall is one-off or ongoing

  1. Go to the Results > Cash flows & Action items step
  2. In the Cash flows (detailed) report, read across the Cash shortfall line and make a note of the years that aren't zero; these are the years there is a shortfall.
  3. If the shortfall happens in one year, it's a one-off, if it happens in multiple years, it's on-going.
2

Check if the shortfall is caused by a particular expense or event

In the first year the shortfall occurs, read down the column for that year to see what else is happening in that year (or check the action items):

  1. See if there is a big event happening in that year. e.g. a property purchase or a large expense, or a reduction in income.
  2. If there is not a big expense in the first year of the shortfall, then also check other years with shortfalls for significant events (e.g paying off a loan by a particular year).
3Check if the surplus cash resolves the shortfall in the future
  1. Go to the Results > Cash flows & Action items step
  2. In the Cash flows (detailed) report, read across the Accumulated cash shortfall line
    1. If the Accumulated cash shortfall line returns to zero, then this tells you that in the future, there will be more excess cash, and that you may be able to resolve the shortfall by delaying expenses or goals.
    2. If the Accumulated cash shortfall line is not zero in the last year of the analysis, then it is likely you will need to make more adjustments, such as reducing annual living expenses.

Suggestions for resolving shortfalls

General suggestions for resolving shortfalls

Regardless of the nature of your cash shortfall, the following general tips are good to keep in mind.



Check your input data are correctSee above.

Make notes when you copy scenarios and do re-runs

  1. Keep in mind that you may have to change a few things and solve several times
  2. Make copies of the scenario before making changes and re-running - this makes it easier to go back to a previous scenario if you need to. For more see How to make another scenario for comparison.
  3. Use the Scenario notes field to keep track of the changes you made to resolve the shortfall (this field is under the Scenario name field in the Cash flows & Goals step)
  4. Remember that there might be several ways to resolve a cash shortfall. It is ultimately up to the individuals in the case to decide on a solution that will work for them.
Prioritise goals

If you need to adjust goals, you may prefer to adjust the lower priority ones first, before considering adjusting more important goals.

Make the instructions for Assets & loans scenarios less restrictive

The more freedom Pathfinder has to optimise, the more likely it is to find a feasible solution. To remove restrictions, go to the Cash flows & Goals > Review assets & loans step step and review the options you've chosen:

  • If possible, choose the 
    Robot button

  • For the Family home and Investment properties, choose to keep the property or sell it in a specific year (avoid choosing 'If optimal' because it can make the solve slower)
Make instructions at the Retirement planning step less restrictive

At the retirement planning step, for voluntary super contributions choose 

Robot button

. If this isn't appropriate, and you want to restrict contributions, use the 'Set maximum contributions' or 'None' (avoid using the 'Set exact contributions' option)
Make the instructions for the SMSF less restrictive

Some common causes of cash shortfalls in SMSFs include:

  • Setting SMSF shares to 'Leave alone' can prevent Pathfinder from drawing a pension, so you can choose a less restrictive options
  • Setting 'Fixed interest' accounts to have a term longer than 1 year in combination with the 'Control by %' option, can prevent the SMSF from rebalancing when it needs to.  So either adjust the term to 1 or change the 'Control by %' option.
  • Setting a deposit amount or property purchase value that is too high for the available SMSF member balances
  • Not allowing enough voluntary super contributions into the fund, so there are sufficient funds in the SMSF.  For more, see Retirement Planning and Build Super results.
  • The individuals having expenses outside the SMSF that are too high, so Pathfinder is trying to make higher withdrawals from the SMSF
See the specific tips for resolving one-off and on-going shortfalls, below.There are also more details for resolving shortfalls caused by property purchases and shortfalls in retirement.
Submit the case to the Optimo Financial SDS

If you need more assistance, or the options you would like are not part of the Websolve, then you can submit the case to the Optimo Financial SDS.

Some examples of things which can be done with the SDS service to help resolve shortfalls are:

  • Taking out a new personal loan
  • Using equity in a home or property as a line of credit.

Specific suggestions for resolving one-off shortfalls



See the general tips, above.
Reduce the value of the goalYou should reduce the value by a bit more than the amount of the cash shortfall. For example, if the shortfall is caused by a $10,000 holiday, and the shortfall is $1,500, then you should reduce the holiday by about $2,000, so the holiday is now $8,000.
Delay the goal

In the cash flows reports, the year the Accumulated cash shortfall returns to zero is good guidance for the earliest affordable year the expense can occur.

For example, if the shortfall is caused by an expense in the third year, and the accumulated cash shortfall returns to zero in the fourth, year, then you can shift the holiday to occur in the fourth year.

Note that the year the shortfall returns to zero is a starting place and you may need to run the scenario several times to find the best year.  If you try the year the shortfall returns to zero and there is a shortfall, you may need to delay the expense further.  If the year the shortfall returns to zero is okay, perhaps make a copy of the scenario and try moving the expense one year earlier to see if that is feasible.

Dip into the cash reserveIn the year the shortfall occurs, reduce the cash reserve (if any) by a little more than the shortfall (for more information see Cash reserve goal)
Combination of the abovee.g. reduce the value and dip into the cash reserve.
Specific tips for resolving a shortfall caused by a property purchase
These tips are in addition to the above tips.


Check you've included a loan

At the Solve step, there will be a warning if a loan has not been added for a property. You can add the loan at the Cash flows & Goals > Review assets & loans step. For more, see Secured loan.

Change the reference year for the property value

Consider whether the property purchase price should be indexed from the first year of analysis or indexed from the purchase year. For example, if the property value is $100,000 in the first year of analysis, and the indexation is 2.5%pa. If the property is purchased in the second year, then the purchase price will be $102,500 (i.e. $100,000 x 2.5%pa growth). If you would like the purchase price to be the value you entered, then in the series builder, change the 'Reference year' to the purchase year (for more, see How to use the series builder)

Consider borrowing more

This can be risky because it may not be realistic to borrow more, plus, it may not resolve the shortfall because the mortgage repayments will be higher.

If it is suitable to borrow more, in Pathfinder you can increase the LVR of the property so a smaller deposit is required.

Review the acquisition costs (stamp duty) of the property

In the results, you can see the acquisition costs used in the action items the year the property is purchased.

If you used Pathfinder's default value for acquisition costs, it may be higher than reality because the actual acquisition costs (especially stamp duty) vary from state to state. If the case has first home buyers, they may also be able to take advantage of additional concessions. Typically, each state government has online calculators you can use to more accurately estimate stamp duty.

The acquisition costs for new family homes and investment properties can be edited at the Cash flows & Goals > Review assets & loans step.

Specific suggestions for resolving on-going shortfalls

If a case has shortfalls in many years, it has an ongoing shortfall where the on-going expenses in the case exceed the income and disposable assets. This can happen for many reasons, but some common cases are:

  • In retirement, spending exceeds income from super, age pension and other assets
  • A property is purchased and the subsequent mortgage repayments are too high


See the general tips, above.


Reduce annual living expenses or calculate maximum feasible living expenses

You can reduce expenses at many stages of the analysis. For example:

  1. Before the shortfall occurs - this will help save more funds
  2. When the shortfall occurs - check how much the shortfall is, and the reduce the expenses by slightly more than that amount.
  3. If the case includes retirement, there are also a few milestones where expenses may change naturally:
    1. At retirement
    2. At incremental stages after retirement. e.g after 10, then 15 years.
  4. Also consider whether there are circumstances where it would be feasible to reduce expenses (e.g. when dependent children leave home)

For more see How to increase or decrease a value in the series builder.

To calculate maximum feasible living expenses, see How to run a 'surplus cash' scenario.

Allow direct assets to be soldCheck the assets and loans report to see if it's feasible to sell any assets. This report is under Detailed reports > Consolidated > Assets & Loans.
Reduce number of years for analysis

This does not solve the cash shortfall, but in some cases, it may be appropriate if you are able to explain the shortfall in another way.

For example, if the shortfall happens in the 20th year of the analysis and is in retirement. It may be simpler to only do the analysis for 19 years and then show that the asset balances at the end of 19 years are low.

For more, see How to set the number of years for analysis.

Specific tips for resolving an on-going shortfall in retirement
Delay retirementFor more, see Retirement planning goal (super contributions and pensions)
Allow more voluntary super depositsAllow more voluntary super deposits. For more, see Retirement planning goal (super contributions and pensions)
Switch on the Age Pension (if it was previously switched off)If you have not allowed the Age Pension, you could try allowing it to see if it helps . For more, see How to include or exclude the Government Age Pension.

If you set a minimum balance in Superannuation, adjust the goal so that super funds can go to zero.

If you have put restrictions on a super fund to keep a minimum balance, and in later years, this minimum balance isn't required, you can adjust it:

  • You can check super fund balance in the Detailed reports > (Individual name) > Super fund balances report.
  • For making adjustments, see, Superannuation (a.k.a Super)
For an SMSF asset, if you set a minimum balance or chose 'leave alone', adjust the goal so that the asset can be solve down

If you have given instructions for an SMSF's assets that don't allow them to be sold (e.g. Leave alone, Keep minimum balance), choose a more flexible options, such as 

Robot button

 or 'Control by %'.
Change investment profile in superIf this is appropriate for the individual's risk profile, try changing the investment profile in super to one with a projected higher return. For more see Superannuation (a.k.a Super).

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