Forecasting: FP&A’s Most Critical Skill

While returning from a recent trip across five European countries and Turkey, I reflected on the six sizzling issues that every single FP&A professional – from London to Istanbul – is dealing with.

In our current economic climate, finance professionals must stay focused on the following skill sets to have a truly positive impact on the business:

  1.  Forecasting.
  2.  Communications.
  3.  Talent acquisition and retention.
  4.  Planning and budgeting.
  5.  Organisational structure
  6.  Technology.

Of the six, forecasting is the most critical and relevant, and hence, tops the list. Why? The short answer is that the world is a quickly evolving, unpredictable place. Two huge recent financial developments serve as apt examples: the dramatic drop in oil prices and the Swiss government’s surprising decision last month to remove the cap on its currency.

Both plummeting oil prices and the Swiss franc (CHF) decision are sending shock waves throughout the global financial sector. Oil prices are rocking markets from the Middle East to Russia and from Norway to the US, while removing a cap from one of the most valued currencies in the world has already created budgeting chaos from Zurich to Bonn, Tokyo to New York, Moscow to Sao Paolo – among other major financial hubs. The decision was so major, it caused Nick Hayek, chief executive (CEO) of Swiss watchmaker Swatch Group to call it “a tsunami for the export industry and for tourism, and finally for the entire country.”

Expecting the Unexpected

While even great FP&A people could likely never have predicted either a dramatic plunge in oil prices or the removal of Swiss currency caps, the best FP&A people have the skills to adjust forecasting for the velocity and magnitude of such market shocks. Forecasting revenue in any market climate today is at best difficult. But properly trained FP&A people are doing less static forecasting and more rolling forecasting. It’s the difference between reactive finance and proactive finance.

“As a yardstick, the rolling forecast is preferable to the static annual budget because it provides the business with a continually refreshed view of opportunities and challenges,” says Mary C. Driscoll, a senior research fellow at APQC, a nonprofit business-research firm. She calls this type of skill set “cultural preparedness”.

Rolling forecasts are becoming more and more prevalent as tides shift faster and with more velocity. A recent study conducted by the Association for Financial Professionals (AFP), the parent organisation for gtnews, found that 44% of finance professionals in the US are shifting away from traditional, static forecasting toward continuous forms of planning. Shortening the budget cycle has become a priority for a majority of companies that are realising the 12-month budget cycle is simply too long.

As the business and economic landscape shifts – as it seems to do on an almost daily basis these days – proactive finance pros are able to adapt with their forecasting models, helping to put plans in place for their organisations not just to survive, but to thrive. What we’ve learned since the global financial crisis of 2008 is that just because something isn’t probable doesn’t mean it isn’t possible. It’s about focusing on the “what if.” After receiving news of the magnitude of the Swiss central bank’s recent decision, management in every sector – from manufacturers to restaurant chains – needs to hear what the plan is. Better forecasting helps put that plan in place.

The interconnected nature of the world today is necessitating finance professionals to look at how one domino affects the next. They have to think about how, say, oil prices affect the Federal Reserve’s decision to raise interest rates or leave them as-is for a quarter or two longer.

Being good at forecasting is not about being perfect but about being better – at least as far as business preparation and flexibility are concerned. It’s about taking complex, variable data and looking across the bow to get a clearer view of where the ship is headed.

To stand out in FP&A, you want to be a contributor to better operating decisions. That starts with better forecasting. Becoming a certified FP&A professional is a huge step in sharpening – and proving – that skill.

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