7 Ways FP&A Can Help Navigate Declining Businesses
- By Ira Apfel
- Published: 4/12/2017
USA Today recently asked, “Is 2017 the death of retail as we know it?” Forbes answered with, “Department Stores are in a death spiral.” Undoubtedly, this is a tough period for retail, as former icons Macy’s, J. C. Penney, Sears, Kmart collectively plan to close more than 3,000 stores. While using retail as an example, the broader question is, What should FP&A do differently when working in an business category that is in structural decline?
Forecast honestly. The first responsibility of a forecast is to present the best estimate of what is going to happen, free from bias, connection to bonuses or a hope of getting back to budget. If the trend lines are negative, FP&A should report that. Businesses in structurally challenged industries are in a race to see the payoff from changes and investments before their losses become insurmountable.
Manage the cash cows. If a business is in decline, that decline can be managed. Evaluate investments honestly and ask whether they are keeping a dying business on life support or a realistic pursuit of a new strategy. Separate the stores that produce cash flow from the ones that are draining resources.
Reevaluate your metrics. The metrics from a stable period may not be relevant in an era of turbulent change. I recently saw a macro metric to describe retail’s struggles that was new to me—retail square footage per capital in the United States is 4.3 times that of France, and 5.6 times that of the United Kingdom. This number indicates a level of change that may be in store.
Reevaluate your competitors. Perhaps it is time to re-evaluate the companies to whom you compare yourself, looking at both leaders and laggards, direct and indirect competitors. What is, or is not, working for them? For example, not all retailers are suffering equally. T.J. Maxx, Marshalls, H&M, Forever 21 and Zara are examples of discount stores and fast-fashion stores with changing inventory and surprise deals that have maintained sales levels. Other stores have been able to differentiate themselves with above average personal service and expertise maintain customer loyalty, including Nordstroms, Ulta, and Best Buy that has made a comeback and avoided Circuit City’s fate. Services and niche products seem to perform better than mass products.
Reevaluate your customers to align corporate capital with customer desires. FP&A should push marketing to understand the customer, both qualitatively (as examples given here) and quantitatively through appropriate customer metrics. FP&A’s role is to allocate company capital to its most profitable application, and that requires that the business knows what the customer wants. While this is traditionally the domain of marketing, FP&A needs to be able to provide effective challenge to investment and spending, and therefore needs to understand the customer.
Update investment models. Investment models generally have three types of data—historical trends, driver, and manual assumptions. Going forward, these cannot be based on business as usual because the company is living in a different operating environment, including the metrics previously discussed, uncertainties about the data and customer behavior, and different assumptions. There is no way around this ambiguity.
Watch for ancillary effects. This is just creative thinking and looking ahead to see what unintended consequence may come up. This may be evidenced in a risk/opportunity tradeoff and is the opposite of a cannibalization analysis.
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