Is business forecasting important? asked Steve Morlidge, co-author of a book with Steve Player entitled ‘Future Ready – How to Master Business Forecasting’ and an ex-financial controller at Unilever Foods UK, when addressing the gathering of senior financial planning and analysis (FP&A) professionals at the third staging of the London FP&A Club on 27 June about the principles and practice of forecasting. Of course it is important, came the answer.
Are you happy with the quality of your forecasting? came the follow-up question. Attendees such as Lewis Girdwood, head of FP&A at easyJet, and Jeremy Dahdi, planning and reporting director at Pearson kept their hands down, in common with all the other 24 delegates at the London FP&A Club.
“It is therefore clear that something is broken isn’t it,” said Morlidge, who went on to discuss how to fix it and discuss how to improve the quality of business forecasting and analysis by concentrating on establishing a process, culture and technological support structure that helps corporates make better decisions. “Business forecasting is information about the future. It is based upon assumptions and you need to get these assumptions right and to constantly validate them all the time – we don’t do enough forecasting in finance in my opinion. If your forecast is wrong it is probably because your assumptions are wrong [or you haven’t checked it regularly enough].”
“Forecasting is a maths story about the future and you need to understand that story,” added Morlidge during his presentation, when stressing that you need a narrative and a sound structure to hold on to, so as not to be distracted by too many figures. Data and technology reporting can be useful and help FP&A professionals predict the future performance of corporations more thoroughly, but only if the data is tamed and analysed properly by trained, alert professionals.
FP&A Certification Plan
The trained professional reference by Morlidge was important because the hosts for the evening, the Association for Financial Professionals (AFP), are planning a new FP&A test and certification programme to set up a professional standard for this growing field. FP&A has received a significant boost in recent years from the development of cheap computing and so-called ‘big data’ analytical techniques and tools that have enabled treasurers, accountants and others to use predictive software to truly look into the future – if they know how to harness the available toolset. Cash management forecasting, visibility, real-time reporting, accounting, project management, the supply chain and other finance functions, can all benefit from the advent of better FP&A technologies, skills and knowledge. However, as yet there is no common definition of the discipline; an absence that the AFP aims to rectify with its new certification.
A learning tool will be launched this summer, followed by a beta version of the test in Q1 2014 and a full launch for the first certificated graduates in Q3 next year, explained Brian Kalish, director of the AFP Finance Practice, who was also in attendance last night, alongside Larysa Melnychuk, secretary of the London FP&A Club, and director of strategy at the Novolar Solutions consultancy.
Six Key Design Principles
Steve Morlidge certainly understands the need for effective financial planning and analysis because he ran Unilever Foods UK dynamic performance management change project from 2002 to 2006. He sought to share the knowledge he obtained back then with the audience of senior professionals, outlining six key principles to remember, while urging attendees at the Montcalm Hotel in the City of London to make their FP&A functions and forecasting plans:
In regard to the first principle, Morlidge emphasised that FP&A professionals need to be the master of their own vessel and ensure they purposed their structures appropriately, and implemented their plans purposefully. “Business forecasting is what finance professionals do – not necessarily strategic planning with 10 different scenarios – so you need one main forecast; one story to be able to measure against.”
Secondly, you need rolling forecasts with consistent timely horizons and waypoint assessments to ensure you are up-to-date, continued Morlidge. He went on to cite a case study from the US’ Southwest Airlines to show the importance of timeliness, illustrating how they forecast some things on a daily, weekly, monthly or quarterly basis, depending upon if it was cash positions, plane leasing arrangements or whatever was the most appropriate metric. “It is up to properly trained financial professionals to design the frequency and functionality of their own forecasting programmes,” he concluded.
The point about actionable plans is that financial controllers and other finance professionals need to deliver, “so think about how you structure your forecasts and only use information that will help you to make a decision”. The single most important thing you can do, advised Morlidge is to define a policy that explains what a ‘good’ forecast is and to then measure against that – cut out anything that is extraneous.
In regard to reliability the point is to find an acceptable level of variation. “If you don’t have any variation your forecast is dishonest,” candidly admitted Morlidge, who also warned to avoid bias and to rethink your process if encountering a lot of errors. Being ‘aligned’ merely meant being aware of risk and to constantly check that your forecasting programme is aligned with the needs of the business. Finally, cost-effectiveness means not doing it cheaply but doing it well, warned Morlidge. “This is not a transactional process,” he said “so you may need to invest time and money into getting it right. Pay for the systems, support and staff that you need to make your business forecasting cost-effective.”
Morlidge concluded by urging the assembled delegates to collapse the decision-making lead times at their corporates if they could. This would reduce their reliance on ‘big data’ analytical tools and technology systems which, although potentially helpful, were not the “be all and end all”. Trained, alert and professional staff should be the priority and the key to unlocking a good business forecasting programme.
“The presentation was very good,” commented Jay Mehta, financial planning manager at UK Power Networks after the end of Steve Morlidge’s speech on business forecasting to the London FP&A Club. “I thought it wasn’t overly technical, used analogies well, but still packed in enough information to be useful for the audience of senior professionals.”
“Indeed, the audience of senior FP&A professionals is one of the attractions of the London FP&A Club and why I came,” he continued. “You never stop learning as a professional and the opportunity to knowledge share like this and bounce ideas off peers is great. I really hope the Club continues to grow, and more and more people put their names forward to present and attend future events. The more people – and knowledge sharing opportunities – there are, the better as far as I’m concerned.”
In regard to AFP certification plans, Mehta gave them a guarded welcome in that he thought they could be useful but the worth depends upon how well the certificate becomes established in future years. “That is the hurdle for the AFP,” he said. “It’s a great idea but it will take time. Maybe partnering with other bodies – such as the Institute of Chartered Accountants of which I am a member – will help to disseminate it more quickly, although the recent events described by the AFP’s Kalish at Microsoft and Starbucks’ offices in the US could also help in this regard. If big firms like that get behind the certification it could give it a push.”
“I didn’t know what to expect and thought I’d only pop in for maybe 30 minutes after work to see what the London FP&A Club was all about,” said Jeremy Dahdi, planning and reporting director at the educational publishers and media firm, Pearson, when speaking to gtnews at the end of the evening. “The fact I am still here a good couple of hours later at 9pm after a good presentation, networking and enjoying talking to my peers and sharing experiences, tells you what a good event it has been. I’ve been very impressed.”
According to Richard Torrens, head of FP&A at Tui Travel, the third staging of the London FP&A Club featured “relevant topics and issues during the presentation and there was certainly enough information to make me want to come back”.
In regard to the development of the AFP certification programme, Torrens added that he “thinks it is a good idea, especially as it is global in nature so very transferable”, referring Kalish’s earlier assertion that the certificate is valid from Australia to Austria. He went on to point out that the FP&A discipline has been around for a long time but that his job title as head of FP&A didn’t perhaps exist that long ago, with the function instead being carried out by an accountant or a financial controller. The new AFP certification could help to further establish FP&A as a job title and a profession in its own right, but that ultimate aim is still some way off at the moment.
First time attendee at the London FP&A Club, Lewis Girdwood, head of FP&A at easyJet, said that it delivered more than he expected. “Steve Morlidge was an interesting speaker who got some really key points around business planning across to his audience in a very realistic and engaging way. His subject matter expertise was clear to see which made the topics covered even more interesting – worth looking out for.
“The AFP certification programme is an interesting step forward in recognising that there are various disciplines and ways of working in FP&A at the moment. The function is currently guided more by the individual, accounting qualification, or just plain business experience, rather than via a single recognised global qualification. That is why it is an interesting instigation to try to launch a standalone certification, particularly at a time when FP&A departments are becoming the norm in most medium-to-large business organisations. I look forward to seeing how the certification programme develops.”
- If you would like to find out more about FP&A and the plans for the Association for Financial Professionals’ (AFP) certification programme please follow this link for more information, sign up to the AFP FP&A e-newsletter or visit the FP&A website. There are also two gtnews FP&A Interviews – with Fabrice Domange, senior vice president (SVP) and head of financial planning and analysis (FP&A) for Europe, Middle-East and Africa (EMEA) at AIG Property and Casualty, and Ricardo Losada Revol, director of corporate finance at World Fuel Services – for those interested in reading more about the subject.
- To contact the London FP&A Club about the free membership for finance professionals, or to find out more details about forthcoming events, please email Larysa Melnychuk or join the LinkedIn FP&A Group. The next staging of the London FP&A Club will be on 1 October 2013, when Rupert Merson, a professor at the London Business School will discuss the interaction between FP&A and organisational culture.
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