SAN FRANCISCO -- AFP’s latest FP&A Guide examined volatility and the ways in which FP&A can anticipate the effects it has on budgeting, forecasting, benchmarking, partnering and risk management. Following up on that topic was a breakout session at FinNext 2018, in which financial professionals provided different perspectives on how volatility has become the “new normal” for FP&A.
Moderator Bryan Lapidus, FP&A, CFO Advisory for Allegiance Advisory Group and a contributing consultant to AFP, began by stressing the importance of meticulous planning in the face of volatility. Although volatility can ultimately make the best laid plans ineffective, planning ahead and then following the challenges carefully as you go along will help you when your plans go awry. “Our forecasts aren’t perfect,” he said. “But the effort of going through it is where we can add value, over and over again.”
WHAT VOLATILITY LOOKS LIKE
One of the greatest sources of volatility for business is market disruption, which can come in many different forms. Lapidus then asked each of the panelists what volatility via disruption looks like from their perspectives.
Michael Lee High, FP&A, FP&A director, Deepwater, Royal Dutch Shell, noted that in his industry, commodity prices are obviously the largest source of volatility. “We’ve had years like 2008 where that swung the topline basically by 70 percent in about six months,” he said.
For High’s FP&A team, the question is always whether price swings like that are just noise, or true signals of a major shift. “That’s a big part of the role of FP&A—trying to take something very volatile like that, cut through it, and help leadership discern whether there’s an actual signal in that noise, or if you just wait and let the volatility ride itself out.”
For Craig Anderson, FP&A, senior manager, financial planning and analysis for the audio streaming app TuneIn, volatility is all around consumer tastes and preferences. TuneIn is primarily a mobile platform, but the advent of devices like the Amazon Echo has led to a reemergence of consumers essentially having radios in their homes again. “The idea of having an audio experience in your home is shifting back,” he said.
In addition to customer preferences on how to consume content, there are also preferences on the content they want to consume. “There was a time when it was all Howard Stern,” Anderson said. “Now, there’s a much more disparate and spread out long tail of talk content.”
Saumya Mohan, Americas region treasurer for Tesla, couldn’t speak specifically about her current company. However, she formerly worked for cybersecurity software giant Symantec, which acquired Veritas in 2005 and then decided to spin off the company in 2015. “There was an announcement, and this was intended to be a tax-free spinoff,” she said. “We had nine months to spin it off, so we started working with tax and all the different departments, because this was a huge company in 40 countries or more. We had to decide how to carve out the two pieces of the business, which by this time were fully integrated.”
A few months into the process, there was another surprise hit—Veritas offered itself up for sale and found a buyer. So instead of a tax-free spinoff, it was now a taxable sale. “So that completely changed the nature of how we wanted to fund the entities and what types of working capital would be needed for them, because it was now going to be the biggest LBO of 2015. All of the entities were now going to be very thinly capitalized, and so our buffers really shrank and our decision points changed a lot.”
WHAT TO EXPECT
Given that finance professionals know that volatility exists, certain factors should be able to be anticipated. Lapidus asked the panel what should reasonably be expected from a planning organization.
Anderson responded that one of the key ways in which his FP&A department supports the business is in providing feedback with operating data. Although that is more or less definitional of what FP&A’s role is to the company, he stressed that FP&A practitioners need to be thoughtful about what they present and who they present it to, and must be able to anticipate the reactions.
For example, one of the three C-suite titles at TuneIn is chief content officer. “When you decide, ‘We’re going to help the company with a better understanding of ROI by content type,’ and you produce a four-quadrant presentation with a bunch of red dots in the negative ROI—each one of those deals is the CCO’s baby,” he said. “So managing not just the data but also the personalities and what their goals are—it’s the combination of those two that has helped us.”
When Mohan was handling planning and forecasting duties at Veritas, she was tasked with forecasting expected revenues by country for a new product, despite having no historical data to extrapolate from. “Starting off, we were off by 1,000 percent in some countries,” she said. “We just had no idea what to forecast for this new product. The same thing can happen in new markets as well.”
So, to define the parameters of what is acceptable in terms of anticipating volatility, Mohan has a few rules. “You should expect near-term forecasts to be very accurate. You should know, to the dollar, everything that is going to be paid, and almost everything that is coming in,” she said. “It also depends on where you’re forecasting for; if it’s a new market, then it’s reasonable to accept lower levels of accuracy. And if you’re looking out further, it’s absolutely understandable to be a bit off.”
DATA VS. VISIONARY LEADERSHIP
Lapidus asked the panel what FP&A should do when working under a Steve Jobs-type of visionary leader who has an idea of where the company should go, even though the data doesn’t support it. Mohan responded that sometimes, in those instances, all FP&A can do is “just report the facts and then let the C-suite decide.”
Anderson agreed, noting that FP&A’s job is to present the data and then it’s up to leadership to determine what they want to do with it. “We call that ‘What do you want to believe?’” he said. “This is what the data says, now what do you want to believe?”
High countered that sometimes, FP&A needs to be the M.D. or the psychologist for the business leader. “Part of our job is to lower the heart attack risk of the leader,” he said. “Getting back to the idea of signal and noise, part of our job is teasing out the kinds of things that are noise, and well ahead of time, start to socialize those with leaders—these are the kinds of volatilities you should expect to come in the forecast.”
For more insights, download Planning in the Age of Volatility, underwritten by Workiva.