In times of volatility and stress, one role of FP&A is to lower the blood pressure of the organization. In a recent AFP Webinar, “Planning in a Volatile Age,” Michael High, FP&A and Reporting Director for Shell, and Mike Boylan, Director of FP&A at Fannie Mae, discussed how an FP&A organization can help lower company stress during volatile periods. Their insights are summarized below, and are divided into two segments.
PREPARING FOR VOLATILITY
- As demonstrated in a webinar audience poll, 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, Fannie Mae prepared videos for the public, investors and the board on the earnings volatility that mark-to-market accounting creates, and how changes in traded securities, not operations, can radically change the company’s GAAP financial statements.
- 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 model, i.e., driver-based model 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 the 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.
REACTING 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 are tracking, and when the next update can be expected
- Separate real from fake fear; put the volatile element into context by compare 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
There will be a further discussion of planning during times of volatility at the AFP FinNext conference in San Francisco in March. And be sure to download the latest FP&A Guide, Planning in the Age of Volatility.
Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him at BLapidus@AllegianceAG.com.
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