Running a company, among other things, requires dealing with ambiguity. How this is done depends on the people – some are more open to embrace the challenges, while others prefer to continue with the past practices, thinking that the change is not going to last. The behavior is not exclusive to a specific industry, it is primarily to do with the management style of people leading the company.
FP&A can certainly better support the business in a set-up where persons in charge are open to recognize the uncertainty and to address it. When it comes to planning and performance management, there are two types of cases to deal with – risks and uncertainties.
Risks are the events which are different compared to the assumptions built in the base plan, but that could be identified under normal circumstances. Those could bring either upsides or downsides to the business.
Traditionally, risk management has been addressing those, essentially predictable, cases through applying the following principles:
- focus on the events which are of significance to the specific business
- assess the impact (i.e. financial, organizational)
- assess the probability / likelihood of occurrence
- set priorities (tackling first the risks with the highest multiple of the impact and probability)
- agree on the action plan
- appoint person(s) in charge
- monitor the development
- take corrective measures
- review (i.e. any new elements to consider, changes that happened in the meantime).
Usually, if CFO is given a mandate to drive risk management on behalf of company, he/she normally relies on the support from FP&A professionals, in particular when it comes to the assessment of risk impacts.
Uncertainties are cases that could normally not be predicted, but which are creating significant disruption for the company. Nowadays, they are often linked to innovation.
We have seen how internet and iPhone have changed the business landscape. But breakthroughs are not exclusive to our century. Industrial revolution brought many changes, and businesses did not disappear. Therefore, for a company to continue to be successful, it is not an absolute must to be innovative. Instead, what it has to ensure is to be able to adapt to the new circumstances fast enough. Degree to which a company can adapt mainly depends on its culture and the commitment from the top management towards being open to change.
When talking about FP&A, the nature of its work requires flexibility. How else would one continue to be enthusiastic about the job and repeatedly start from scratch when working on business scenarios? As such, FP&A can be the advocate in making and keeping the rest of the company comfortable with implementing new ways of working or new projects to focus on.
There are different activities involved in recognizing and responding to the new reality:
- monitor external environment, identify new trends and innovations with the focus on the changes that those bring
- determine the significance which identified change / innovation has on the company and its key stakeholders
- depending on the level of significance, identify and prioritize what the company should and could do differently as a response to those changes
- define the action plan, including roles and responsibilities of the individuals
- implement the action plan
- monitor the execution of the action plan
- measure the performance of the outcomes
- share the update on the progress with relevant parties
- take corrective actions if needed
- in parallel, continue monitoring external developments and repeating the process
Identifying significant changes
In order to respond to a change, it is necessary to first be aware of it. Therefore it is important to keep track of the developments in the outside world, while remembering that not every initially appealing invention automatically represents an exposure for the operations. Polaroid camera was an attractive product, but it did not revolutionize photography. However, digital camera has changed it for good.
Implications for the businesses tend to occur more when a change increases quality and flexibility for the users and/or it goes beyond the experience of an individual. Price has also been a significant factor in many cases, which low-cost airlines and “one-dollar” stores built their models upon.
Depending on the industry, knowledge and experience of colleagues working in other functions is invaluable for having a comprehensive evaluation of potential impacts. As it often comes down to how customers and consumers (will) respond, cooperation with marketing and sales teams is essential. Those departments are normally expected to provide the estimates on the potential developments, such as the movements in demand / consumption, while FP&A contributes by reviewing those estimates and revising them when feasible and complementing the picture by adding a financial dimension to it.
For the top management to make an adequate decision, they should be presented with a clear business case. Still, no prediction is certain when dealing with unknown future. To help with putting the things into perspective, FP&A can provide quantified scenarios and financial impacts of changes in percentages, such as what is the impact on sales and profit if losing 1% share of market; level of investment required to upgrade or set production facilities and payback period for introducing the new product, etc.
Performance management and business continuity
Once the decision is taken to go ahead with a specific project, FP&A focuses on its performance management, helping project lead with keeping track of the progress and providing early signals for major variances. In order to properly do that, FP&A should have adequate tools, practices and manpower.
Last but not least, it is up to people leading the FP&A department to ensure a proper structure and task allocation within their own team – strategic projects are important but it should not be forgotten that FP&A also has to prepare many other outputs to secure business continuity.
The article was first published in Unit 4 Prevero Blog