12 Steps FP&A Can Take to Reduce Forecast Volatility

May 16, 2019 | 5 minute read
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By Bryan Lapidus, FP&A

In times of volatility and stress, one role of FP&A is to lower the blood pressure of the organization. To manage short-term volatility, FP&A practitioners often have a principled response: follow the core attributes of your company.

At AFP’s recent FinNext event, a panel of experts came together to discuss how market changes can upend their operations, and how they navigate their teams through the volatility. One common thread among the responses is that, while volatility can disrupt plans and create panic, the most effective way to respond is to have a set of guiding principles to organize your thoughts and reactions. Without this, teams can be adrift among the sea of potential responses, chasing different ends and losing focus.

What follows are three examples of volatility faced by the panelists and their approaches, along with concrete steps that FP&A can take to prepare for and react to volatility.

Example 1: Consumer volatility—Know what you deliver

Craig Anderson is the Senior Manager, Financial Planning & Analysis at TuneIn, a venture-backed app that makes the content of live sporting events, live news, and thousands of podcasts and radio stations available on connected devices. “It is like Netflix for live audio content,” he says.

In recent years, TuneIn has had to respond to changing consumer preferences in the hardware they use to listen to their audio content. At one time it was all about computer access, then it was a shift to mobile platforms, and now the team is addressing the growth in home smart speakers and platforms (such as Alexa, Google Home and Cortana). During a conversation about TuneIn's long-range planning, the CEO commented to Craig, “Our value to our listeners is the content we are delivering to them. In that way, we are a content company. We will meet the customer on any platform they wish.” The key for TuneIn is to focus on the content they deliver, not necessarily where it is delivered.

Example 2: Production development volatility—Know your operating principles

Saumya Mohan, a Silicon Valley veteran, discussed how a similar company focus can help frame the reaction to volatility. “Having a clear beacon (say, customer satisfaction) helps to prioritize need for change. The business environment may change but maintaining that singular focus will help to see through the volatility, and also help different teams find something they can agree upon.”

This mission focus can put the entire organization on the same page. For example, if there are discussions about potential changes to design and product features, and the associated cost and delays, the group can go back to their first principles and ask, “Does this make the customer experience better?” They should have the central principal as their touchstone to sort through challenges.

Example 3: Market volatility—Keep a long-term focus

An oil rig can take years to build and have a useful life of decades. What happens when a company with an investment horizon of decades manages daily volatility in the market place (in this case, oil prices)?

One of the panelists was the head of business planning and appraisal at an international, publicly-traded oil and gas company. He offered several perspectives on how his team manages volatility in his businesses.

First, the long-term investment side tries to look through the turbulence into the future. Investments are made with optionality, such as delaying the decision cut off point, shortening the build time once the decision has been made, and building opportunities for modular, incremental expansions at later periods. All reflect ways to manage investment cash flow.

Second, he noted that having a dividend forces discipline on corporate risk taking. The company has paid its dividend consistently for six decades; the weight of maintaining this streak enforces capital conservatism and people weigh their actions relative to the potential impact on dividend payments.

Steps to prepare for volatility

Most volatility comes from known sources rather than out of the blue. Therefore, preparing for volatility includes educating your audience about the potential for volatility, impacts, and reactions. For example, some companies prepare informational packets for the public, investors and the board on the earnings volatility that arise from non-operational factors, such as mark-to-market accounting, changes in traded securities held on the balance sheet, and one-time adjustments.

  • Create a risk register of potential risks before they occur. Lay out the risks and assumptions and look for ways to expose the potential upside to the plan change. Also note where the past is or is not a good indicator of future events.
  • Know your risk tolerance ahead of time. What are acceptable boundaries before taking action, and what would the action be? A formal, corporate risk appetite exercise is useful in these situations.
  • Ensure that you and your staff have capacity to take on unexpected fire drills. If the team is at 110 percent of utilization before an event occurs, where will you find the time and energy to react?
  • Some may be upset with FP&A for producing an inaccurate forecast, budget or plan; mitigate this ahead of time by cataloging and sharing the assumptions that underlie the plan and noting the source of the assumption. As those assumptions change, naturally the plan changes.
  • Be sure that you have flexible and forward-looking models—for example, driver-based models that can simulate potential outcomes to variable inputs and answer a myriad of questions.
  • Sniff out volatility early in the process. Rely on your front line of business partners to bring signals of risk back into the company. Most disruption comes from the outside, and you should know who among your business partners will know about it first.

Steps to react to volatility

  • No one likes surprises, especially leadership. Professional judgement is required to know when to escalate information. Do not wait for perfect information before sharing potential warnings, but at the other extreme, do not report on every potential incident because you may be seen as alarmist.
  • Be transparent in explaining what you know and don’t know, what items you’re tracking, and when the next update can be expected.
  • Separate real from fake fear; put the volatile element into context by comparing to known standards, including a risk appetite or volatility limit, past volatile events, and of course financial planning. Present sensitivities to the forecast.
  • Discuss the risk with people who have lived through cyclicality of the industry. Some cycles will repeat (see the boom and bust cycle of oil and gas) and may reverse themselves eventually.
  • Establish good communications, which includes good reporting on the topic. This will include running the volatile element through existing reports to show the potential impact in a format that is familiar, as well as other reports that focus on the event itself.
  • Consider the question of finance’s role: How far should finance go into operations to help address the challenge, versus remaining in a corporate role to be the scoreboard and report out to the enterprise? Both are valuable, and both have their place, but you may not have the resources to do both when the going gets tough.

Bryan Lapidus, FP&A, has more than 20 years of experience in the corporate FP&A and treasury space working at Fortune 200 and private equity-owned companies. At AFP he is the staff subject matter expert on FP&A, which includes designing content to meet the needs of the profession and helping keep members current on developing topics. Bryan is also a member of the Global Advisory Board for The CFO Alliance. You can reach him at Blapidus@afponline.org.

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