How should the role of chance influence the work of FP&A practitioners?
Intentions may lead to results that were not intended. There are times in which good intentions may lead to bad results or an idea that is designed to accomplish one task may succeed by performing a completely different task. As a result, FP&A practitioners should recognize the role of chance in FP&A.
Earlier this year I had an opportunity to re-read How Not to Be Wrong: The Power of Mathematical Thinking by Jordan Ellenberg. The book contains a number of stories and one story stood out in particular. A reason that this particular story stood out is it made me think about the role of chance in FP&A.
The particular story applies to a book written by Horace Secrist; Secrist was a statistics professor and director of the Bureau for Business Research at Northwestern University. The book was a 468-page volume that presented detailed statistics of several businesses within various industries. A purpose of the book was to provide insights into why some businesses succeed while other businesses fail. An insight that the book provided was success or failure was not permanent. For example, within a 6 year period, clothing stores that were successful at the beginning of the period lost their competitive advantage while clothing stores that were failures at the beginning of the period improved their performance toward the average. This phenomenon also occurred within industries like hardware stores and grocery stores. This phenomenon led Secrist to title his book The Triumph of Mediocrity in Business.
Ellenberg expanded his description of Secrist’s work by presenting comments from Harold Hotelling; Hotelling was a mathematical statistician and economic theorist. One comment made by Hotelling about Secrist’s work was the statistics that Secrist presented tend to fluctuate. The fluctuation, according to Secrist, was the result of competition. Competition among firms made them similar statistically over a period of time. Hotelling disagreed with this assessment. According to Hotelling the fluctuation was obvious from a mathematics perspective. This perspective saw the fluctuation was influenced by the role of chance.
How should the role of chance influence the work of FP&A practitioners? One area that FP&A practitioners should consider the role of chance is in revenue. The benefits that can be derived from certain products or services may not be immediately realized. For example, computers were seen as computational tools however computers have become tools for communication and resources for information. Another area that FP&A practitioners should consider the role of chance is in expenses. Certain expenses can be tied to long-term contracts that established rates below market but once these contracts expire the benefit from below market rates disappear; I saw this situation first-hand when a retailer saw their store rents double after their lease agreements expired. Perhaps FP&A practitioners should consider the importance of being in the right place at the right time when thinking and learning about how companies generate income as well as cash flows.
Intentions may lead to results that were not intended. There are times in which good intentions may lead to bad results or an idea that is designed to accomplish one task may succeed by performing a completely different task. As a result , practitioners should recognize the role of chance in FP&A.