The AFP Asia-Pacific Financial Planning & Analysis Advisory Council (FPAAC) met to discuss what financial forecasting looks like now when there are so many disruptions. The group talked about defining their financial guidelines, re-examining budgeting and forecasting processes, and changing metrics used to operate the company.
Connagh Hopkins, head of function, business planning and reporting, Western Power, explained that as her company approached the end of its annual long-term planning cycle and began to look ahead, she realized that her normal methods of forecasting would lead to unsustainable estimates. Both external labor costs and material costs had increased — should she assume that costs would normalize after a couple years? Or would costs continue to stay up? Her challenge was to determine what assumptions to use in her forecasts.
Define Financial Goals
One step companies can take is defining pricing or margin strategy. While companies may have limited ability to control their inputs cost, they can control pricing and use this as a way to protect gross and net margins. And in response to higher costs, companies may choose to raise prices — even proactively.
Working for a consumer product goods company, Danny Shiu, FPAC, CTP, MOS, consultant, saw an opportunity to proactively raise prices. Anticipating inflation pressure, it was able to pass costs on to consumers, even a bit faster than its own costs in the beginning of the inflation cycle.
Peggy Ang, FP&A lead for APAC, National Instruments, noted that it is important for companies to pay attention to how their competitors are acting before raising prices. Raising prices in a competitive market runs the risk of losing market share which could hurt long-term performance when conditions stabilize.
Ang also explained that one reason companies are raising prices is to cover fixed expenses, specifically rising salary, general and administrative expenses. Hiring has been a challenge for companies that have more roles to fill than qualified candidates.
Douglas Yeung, FPAC, echoed this observation and explained how his company manages the situation. Previously, they would benchmark their salaries to the high end of researched market ranges (or even above). However, they are now targeting the middle of the (elevated) market pay packages.
Another council member noted that not all customers are created equally, and given supply chain impacts, they had to align their financial and operational strategy. They could not fulfill all customer orders, so they prioritized high-margin and strategic clients, and in some cases, repurchased inventory from some customers to reallocate to others.
On the treasury side, because foreign exchange currencies are trending weaker against the USD, some companies are looking into taking a position on currencies, instead of simply hedging away risk, as a way to make money.
Change Your Forecasting Process
Challenging times may call for changes in the planning process. Hopkins and her team originally planned to apply a top-down budget process, but soon found that uncertainty in various areas led to an unacceptable plan. This drove her team to dive deeper and understand the business at a greater level of detail to provide an accurate outlook and provide recommendations to the business.
Yeung also ran into challenges with using a top-down budget due to staffing limitations. Because there had been a lot of movement in the labor market, the company had difficulties finding, onboarding and training enough people to deliver the revenue from the sales team. The top-down approach did not acknowledge the challenge of meeting staffing shortages, so Yeung also had to apply a bottom-up approach.
The group was asked if a no-budget approach would be a good option to deal with uncertainty, since comparison to plan would have significant variance. Hopkins gave voice to the council’s consensus, explaining that she still needed a way to make this comparison for management and understand sources of variance.
One way to approach this question is to gain a comprehensive understanding of potential uncertainties. Johan Van Zyl, senior vice president, data and process automation COE director, Marsh, suggested using rolling forecast techniques to look ahead and understand uncertainties as they change. In this way, companies can develop response options for various situations.
As volatility continues to increase, there may be more incentive to build a flexible structure that gives a company leeway to experiment with drivers and see what the outcomes are. By using scenario analysis, you can look for the opportunities that others might miss.
Change the Metrics You Use to Operate the Company
Volatility, which has always been part of forecasting, has been heightened by disruptions related to the pandemic — like lockdowns in China — and the war in Ukraine, which has contributed to supply chain challenges. As a result, companies cannot use recent metrics in their forecasting. In response to risk and contraction, some companies opt to place a greater emphasis on cash flow than net income, and recouping investments costs instead of net present value (NPV).
Kevin Wong, director of finance, APAC, Blue Bottle Coffee, has found that because of the pandemic he needs to monitor each market’s COVID case rate, governmental policies, and travel much more closely than he used to. His company had to shift resources between Asia and North America multiple times depending on whether consumers were able to venture to their stores, buying retail or not buying at all. While these factors don’t change the company’s key performance indicators, they are upstream signals to the company’s business and are important to consider from a global operations perspective.
Working for a company that is majority owned by two private equity companies, Yeung has felt the impact of declining valuations in the private equity and tech sectors. Since 2021, the company has actively talked about going into IPO, and valuation is a big concern that factors into the company’s spending, especially around hiring. The decline in public market multiples has rippled to the private market and reduced capital.
Hopkins reminded of the importance of non-financial metrics. As a governmental regulated power company, her driving metrics include reliability, safety, and community outcomes, balanced against a traditional net present value (NPV).
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