Financial, Planning and Analysis (FP&A) professionals are in uncharted waters. With businesses facing increased levels of volatility, it has rarely been more important for treasury professionals and their colleagues to ensure they are able to anticipate the likely effects on all aspects of their organisation’s functioning. Forecasting, budgeting, risk management, benchmarking and partnering are some of the areas most likely to be affected, although the precise effects depend upon the source of the volatility. This, of course, will vary between businesses and, at times, within a business.
The latest guide from the Association for Financial Professionals looks in more detail at how volatility is currently affecting FP&A professionals. As a spin-off from this, a discussion at FinNext 2018 provided finance professionals with the chance to offer their own views and experiences to an audience of interested colleagues. One point that was made repeatedly was that market disruption is currently one of the predictors of volatility within a business.
Explaining volatility via disruption
Volatility via disruption looks very different depending upon the business experiencing it. For example:
Within the oil and gas industry, the FP&A director of Deepwater, Royal Dutch Shell, Michael Lee High, noted that commodity prices are the most significant cause of volatility. 2008, for example, was a particularly challenging year, seeing a 70% shift to the topline in only six months. However, High also made the important point that, radical as they may appear, major topline shifts such as the one experienced in 2008 are not always indicative of a true shift. There is a real knack in discerning whether something will actually “ride itself out”. For a company’s leadership, it is essential to get this right: implementing changes in response to what later proves to be a one-off, temporary shift to the topline may result in new problems.
This is a particular concern for businesses selling lifestyle services directly to consumers. As an example, Tuneln, the audio streaming app, was used to providing its services via a mobile platform. However, the surge of interest in the Amazon Echo and similar devices has resulted in increased use of home radios. This change in the way in which many consumers are choosing to consume their audio content represents a real challenge – and consequent volatility – for businesses such as Tuneln.
Learning to anticipate and what that means
If it is accepted that a certain degree of volatility is a given, finance professionals need to anticipate certain events and/or factors. More than this, they need to give careful consideration about who they present with their findings. Part of this includes the ability to anticipate their audience’s reaction.
The precision with which any degree of volatility can be anticipated depends on the length of the forecast in question. Near-term forecasts are likely to be highly accurate. Longer-term forecasts may well be less so. In addition, it is sensible to expect reduced levels of accuracy if a forecast is for a new market.
Volatility and leadership
One of the challenges that FP&A professionals frequently come up against is how to cope with a visionary leader, who may seek to disregard data and forecasting results. The consensus is that the job of FP&A staff is to present the facts and leave the leadership team to do as they will with them. Needless to say, this is not a view that is shared by all industry professionals. Some believe that in certain instances it is right and proper for FP&A professionals to act in a manner akin to a psychologist for the leadership team. Done correctly, this may enable management to discard volatility that amounts to little more than white noise and focus on trends that are likely to be longer-lasting and of greater ongoing importance.
Volatility – the new normal?
Whether any particular FP&A professional views volatility as their “new normal” is likely to be coloured by their specific industry and the challenges and market goals of their organisation. That said, a degree of volatility is usual in any business. Having a clear and rigorous plan to anticipate volatility and tease out its significance is crucial. Whether or not volatility is an ongoing issue or is being experienced at a rate of incidence higher than in previous years is almost a secondary concern. With the right policies and plans in place, a business and its FP&A teams should be better able to rise to the challenges thrown at them by the marketplace and the wider economic situation.
Simon Lynch is the owner of Treasury Talent.
Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact firstname.lastname@example.org