FP&A Tools: Galileo's Wisdom Holds Good
The role of FP&A professionals in many firms has changed drastically, from pure reporting of “the numbers” to having a more strategic focus on supporting critical business decisions, driving improvements, and adding value to the business in general. It has also moved from compiling and validating historical performance data, and ‘slicing and dicing’ it to identify past relationships and trends, to a more forward-looking view with a focus on delivering insights behind the metrics.
The drivers for this transformation are mainly of a macroeconomic nature – high levels of uncertainty in the global economy and financial markets are creating an environment where analytical tools are essential to predict the future more dynamically. The need to look ahead, to keep up with the accelerated speed of business, and to deal with the challenges of an ever-changing marketplace also requires different data and information, as well as new ways to deal with large volumes of data.
The evolution of the role has been supported by advancements in information technology (IT). Analytical tools such as predictive modelling and Monte Carlo simulation allow scenario analysis that produces various outcomes over differing horizons. Automated management reporting systems and outsourcing of the traditional FP&A activities to lower-cost jurisdictions frees up essential time and resources to focus on higher-value activities.
FP&A and risk management are closely linked. The external environment continues to cause concern to many companies, and in order to manage a company’s financials amid these uncertainties, the ability to accurately forecast risks is key. Organisations need to identify critical failure points and then overlay those with consequent loss of revenue calculations based upon historical data and predictive models. By undertaking this level of detailed analysis, tailored advice as to the most efficient risk transfer mechanism may be provided.
The integration of risk and forecasting doesn’t just involve close collaboration between two teams, but also the use of analytical methods to quantify the impact of risk. It is not about having a crystal ball – understanding the relationship between financial performance and risk drivers can help with important strategic decisions. Making use of analytics, however, can eliminate a fair amount of guess work. Established actuarial modelling techniques can integrate multiple risks and generate a range of possible outcomes and probabilities.
Translating Data
The basis of the FP&A professional’s work is data – in whatever form and shape – which is translated into relevant, consistent, and unbiased information. It is no longer sufficient to simply include data from internal sources. While obtaining data within global organisations is often challenging enough, accessing external data which allows a company to form insight into the wider possible risks and opportunities it may face, requires a much broader view. “Big data” is the new buzzword, and companies are investing significant resources into the collection of data as a strategic asset.
Technological advancements can help manage large volumes of data. However, without a clear company strategy on how to approach data and what metrics are relevant to the management of the organisation, the value of “big data” is minimal. Any strategy needs to commence with a vision of what is to be achieved, and what the business needs to do to the data to achieve this vision.
Only once this is understood – and FP&A professionals are increasingly part of this discussion – can decisions be made as to what data is required to achieve the goals. At this point a review of where the organisation is will allow for the development of a plan that may consider which processes, resources/skill sets, and technologies need to be adopted within the business, to firstly get the data into the required state, and then to analyse, deploy and measure ongoing impacts.
Marsh recognises that “data analytics”, or the use of raw data to produce insights or conclusions, is essential when advising clients on their risk financing options. The Marsh Analytical Platform (MAP) combines big data, mobile technology, risk-adjusted benchmarking, and predictive analytics into a single tool which enables clients to quantify and manage risks.
MAP can help FP&A professionals perform strategic tasks required by offering access to relevant, real-time information, and the analytical tools to extract insights. This can not only inform a company’s risk management strategy, it can identify new opportunities for growth and also highlight the potential risks associated. Scenario planning and sensitivity analysis are the only two tools which can help make informed predictions. Combining this with “big data” can significantly enhance the accuracy of the forecasts and therefore increase its value to FP&A professionals.
It is perhaps this requirement for detailed strategic planning that represents the greatest opportunity for FP&A professionals. Analytical ability has always formed a key part of their skill-set and a recognition of its value to businesses in a changing world of evidence-based forecasting is clear. An understanding of the challenges inherent in the development of data strategies combined with those core skills will ensure FP&A professionals continue to provide enhanced value to the orgainsations in which they operate.