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The need to master Strategic Modeling by FP&A professionals







Some lessons learnt from a Finance Transformation exercise


Earlier this month, I had the privilege of concluding a very satisfying year-long finance transformation assignment for a large technology company operating all over the Far East. Our focus was to transform the basic approach and build capabilities (both in terms of human resource and enabling technologies) so that the finance function becomes a value creator, i.e., gain the ability to collaborate with business functions on actionable ways to course correct and drive growth.


It is sometimes surprising to witness (at least, I continue to come across at a client after client) that even in a post COVID world, where rapid disruption is not just a theoretical planning scenario, finance functions (and FP&A teams) continue to be preoccupied with preparing reports, which are based on the analyses of recent historic data and future scenarios of varying levels of growth or shrinkage.


Most large companies have tens (if not hundreds) of financial planning & analysis (FP&A) professionals. On a daily basis, they enter multitudes of data into Excel or other technology apps to perform event-based planning and run what-if scenarios for budgeting, planning, forecasting, and report generation. Does all this effort safeguard against rapid and massive disruption? The answer is most likely a NO.


The trick is not just to produce endless long and short-term scenario and fancy financial models. No matter how much of scenario planning you do, it does not necessarily increase your chances of thriving and survival through disruptive challenges.


It is the ability of a business to respond to disruptive challenges promptly and effectively which is a game changer and helps the business sail through. Operating functions throughout any large business, such as sales and operations, need real-time, on-demand data to make tactical decisions that address critical questions and in turn help the overall business remain competitive and profitable amid disruption.


By developing strategic modeling capabilities in FP&A teams, the finance function becomes a value creator, i.e., gain the ability to collaborate with business functions on actionable ways to course correct and drive growth.


What is strategic modeling and why it is important for FP&A teams to master it?


Strategic modeling is a sustainable capability (often software driven or aided) to quickly provide basis for informed tactical decisions. Strategic modeling can help assess the impact of unexpected external events and business model shifts while providing what-if scenarios.

FP&A teams analyze internal and external third-party data on demand to obtain timely results (preferably in the same day). It is not carried out with a view to drive large, wide scope transformation. The goal is to enable a focused business-savvy FP&A team to:


  • Tackle a focused tactical issue (or a group of similar issues) which is current and needs a prompt response by the operating teams

  • Determine what date (internal and external) is needed for analysis and what is it they need to learn from the data

  • Aid with addressing the issue by delivering tactical recommendations through short-term modeling and various what-if scenarios

  • Leverage the learning to address related/additional problems


Faced with disruptive challenges, businesses and operating teams cannot wait for weeks (or end of quarterly reporting cycles) to get answers questions such as:


  • When (or if) we can return to the revenue levels which have been affected by disruption?

  • Should we maintain or support staff levels? And if we do, how long can we sustain it?

  • Do we need to reduce (or increase) the price point of our products/services?

  • What new channels should we explore and how is it going to affect our bottom line?

  • Should we continue with our current store locations or do we need to alter?

  • How do we exploit an opportunity which has arisen because of disruption?

  • When should we bring the operations to a normal level as the opportunity for extraordinary revenues is likely to disappear at some point?


In a post COVID world, where some of the business operating patterns have changed somewhat permanently, some are going back to the days before the pandemic. For instance, a large number of businesses have gone or are increasingly going back to operating out of physical/city center offices, whilst some have decided to stick to a reduced office real-estate footprint.


A good example of businesses which could get affected is of energy distributors and transport companies. With a shift from suburbs back to the cities, and from homes to offices, the energy load patterns as well as commuting patterns are shifting very quickly.


No one can predict exactly where it will eventually lead to, but the energy distributors and transport businesses need to be able to quickly identify those emerging patterns and adjust their resources and the way they provide services. By leveraging strategic modeling, FP&A teams in such businesses must be able to rapidly establish scenarios and model out various outcomes depending on the duration and magnitude of these shifts in usage patterns. The resulting response could include the deployment of their work crews differently and understand the impacts of this alternative delivery on their financial results.


Another example could be of food retailers. As the memory of the pandemic slowly fades away, consumer behavior/patterns could drastically and rapidly change. For instance, away from a tendency to stock pile. FP&A teams within such businesses should be able to promptly aid the operating teams trying to address tactical questions about operating options.


Typical areas which would test the ability of modern FP&A teams to leverage strategic modeling include: how to respond to liquidity constraints, capital financing and allocation, capital expense deferrals, revenue and profit analyses, commodity price fluctuations, industry impacts, disruptions in supply chain, and revenue shortfalls. FP&A professionals must be able to deliver short and long-term tactical recommendations which can bring the operational plan in harmony with the disruptive challenges.


Possibly faced with disruption, through strategic modeling and scenario planning, FP&A has the opportunity to drive business strategies, ensure sustainability, and improve performance quickly. But to achieve that goal, FP&A teams need to move beyond historical and internal data which they very often rely on and instead look at the external factors that have correlations with their business. It also means incorporating short-term predictive models, rooted in machine learning and artificial intelligence, that are needed to guide the business.


 

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Strategic Finance Consultant ✅ ACS SYNERGY ✅ At ACS, we help growth seeking businesses with Finance Transformation, Accounting & Finance Operations, FP&A, Strategy, Valuation, & M&A 📧 Message me 🌐 acssynergy.com

Unprecedented marketplace disruptions require businesses to reinvent existing finance processes, organization structures, and strategic imperatives. Forecasting process needs to be agile, predictive, and continuous. To develop an effective rolling-forecast process, an organization needs to identify the right drivers that have an impact on the organization’s financial performance. Also important is the need to avoid an unnecessary lengthening of the overall budget cycle. The use of right technology, such as artificial intelligence and machine learning, to automate the process, where possible, can free up capacity within the organization to unlock value.


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