The Peabody Effect: New Challenges for FP&A

Nov 13, 2015

Nilly Essaides, Director & Practice Lead, Financial Planning & Analysis, AFP

The recent decision by the NY State General Attorney that Peabody Energy should have given its investors more precise forecasting data on how climate change would affect it sales may have repercussions beyond the energy industry (Exxon Mobile is under a similar investigation) and a profound impact on what kinds of risks FP&A will be asked to forecast and for what audience going forward. That’s particularly true, as was the case for Peabody, when the companies run that sort of analysis internally already. Those sort of numbers will now have to be disclosed to investors as well.

According to an article on Nov 13 in the New York Times, future risks may be the impact of the campaign against obesity (companies in consumer goods and beverages), or the rise in the cost of pharmaceuticals (insurers and healthcare companies). These macro risks are not always part of what FP&A takes into account today. While the initial ruling applies only to companies that already perform the analysis internally but fail to share it with investors, overtime the pressure will likely rise on companies – as others’ disclose – to start running the analysis too.This is just another case of how FP&A is called upon to play a more strategic role in the flashpoint between risk and enterprise performance.

How can FP&A Overcome the Challenge?

Clearly, those kinds of what-if and scenario analysis cannot be handled by basic technology. So the first thing FP&A and finance departments should consider is the kind of tools required to run the analytics to support the complex math that can translate data on weather, or sugar consumption, or projected drug prices into revenue projections. In many cases, these external factors are not typically considered key business drivers and are not necessarily incorporated into existing driver-based models. Many experts consider drivers to be elements that are within the company’s control. But not always. Some companies (see upcoming AFP FP&A Guide: What’s Driver-Based Modeling and how does it Work?), incorporate external drivers, like housing starts or patent filings into their driver-based models.

In addition, this puts the onus on finance and FP&A to begin to make better use of big data and have the right talent in place. While big data may be a scary thought for many in the profession, FP&A must learn to harness the avalanche of information, turn it into knowledge and translate that knowledge into action items for senior management. In the area of external and expansive information,like consumer consumption of beverages, or projections on climate change, that data can indeed be overwhelming. Companies will need the right talent to help make sense of this less precise data, identify patterns and turn those into business intelligence.

Finally, FP&A needs to review what kind of analysis it currently conducts internally for management reporting and business intelligence purposes and what forecasting data points it releases to the public. Under the new ruling, there shouldn’t be a mismatch between the two. The information about the future performance of sales that’s provided to senior management should also be available to investors.