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Articles

New Forecasting Challenges for FP&A: The Peabody Effect

  • By Nilly Essaides
  • Published: 11/17/2015

coalplantstacksThe recent decision by New York State Attorney General Eric T. Schneiderman that Peabody Energy should have given its investors more precise forecasting data on how climate change would affect its sales may have repercussions beyond the energy industry, as well as a profound impact on what kinds of risks financial planning and analysis (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 may have to be disclosed to investors as well.

According to a November 13 article in The New York Times, future risks may include 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 analyses cannot be handled by basic technology. The first thing FP&A departments should consider is the technology needed to run analytics that can translate data on weather, or sugar consumption, or projected drug prices, etc., 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, as the upcoming AFP FP&A Guide, What’s Driver-Based Modeling and How Does it Work? explains, 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 make better use of big data. According to one practitioner, “big data remains scary to many people. It’s the elephant in the room. But it’s a manageable elephant.” This FP&A manager for a software company believes that “big data is hugely important for the FP&A world specifically and finance as a whole.” That is what will separate the good FP&A teams from the best.

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.

The AFP FP&A Guide, What’s Driver-Based Modeling and how How does Does it Work?, will be published on January 22, 2016.

 

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