Financial Planning and Analysis: Challenges and Opportunities in an Unpredictable Environment
by Jim Kaitz, CEO, Association for Financial Professionals (AFP)
In this article, Jim Kaitz, CEO of the Association for Financial Professionals (AFP), comments on the Tesco inquiry and outlines the importance of a strong corporate culture, reliable forecasting practices and the integration of corporations’ risk management practices with their financial planning and analysis departments.
Tesco’s profit overstatement
After a few successive profit warnings, a plummeting share price, difficulties retaining customers in the current UK supermarket price war and the subsequent departure of its CEO, Tesco recently announced that it had overstated its profits by 23%, or £250m. Following the announcement of this ‘accountancy scandal’, Tesco launched an investigation and suspended five executives, including most recently, its Group Commercial Director.
The £250m shortfall was brought to the attention of the company by a whistle-blower. Allegedly, the retailer was prematurely booking income from supplier deals whilst pushing back costs. According to some sources, these actions were taken to help the retailer to compete with the likes of Aldi and Lidl.
Before this, Tesco had come under major public scrutiny after it was widely published that its CFO stepped down in April 2014, whilst his successor was not due to join until October this year. The retailer admitted on 25 September that between April and October, its CFO had not been involved in any financial decision-making and instead, former CEO Philip Clarke had set up a separate team of financial professionals to manage its finances. Shortly after the overstatement was announced, Tesco’s new CFO joined the company; a month earlier than expected.
While Tesco’s announcement appears to have resulted from an accountancy scandal, even less nefarious situations can cause financial and reputational damages, and cost financial executives their jobs. One major US retailer announced a seven-figure forecasting error that reportedly stemmed from a failure to recognise risks and changing business conditions in one of its business segments. While it is generally accepted that this was a forecasting error and nothing wilful, the financial impact was nonetheless swift and material, as was the retirement of the company’s CFO.
As an expert in financial planning and analysis, AFP recently commented on these issues, claiming that the forecasting error was due to a lack of communication between the company’s financial department and other parts of the company.
Association for Financial Professionals
Both of these issues are excellent examples of the importance of a strong corporate culture, reliable forecasting practices, and lastly, the integration of corporations’ risk management practices with their financial planning and analysis departments. AFP is a representative organisation for financial and treasury professionals worldwide and recently launched its financial planning and analysis (FP&A) credential, which tests the skills of professionals that are necessary for effective financial planning and analysis.
Organisational culture and structure
Culture is often considered to be rather invisible and therefore it can be overlooked by corporate leaders and managers. However, corporate culture should be seen as a control mechanism for financial and operational processes and should therefore be actively managed.
A corporate culture functions as the company’s personality and it can foster operational awareness amongst employees. Sustainable culture models should have a governance structure that includes different employees playing different roles, since the separation of duties helps to gather different inputs and perspectives and provides alignment across the company. A strong model culture will produce better calculations, fewer errors will be made and less time will have to be spent on fixing errors. In addition, the collaboration between team members will increase, which will benefit cross-training and the sharing of institutional knowledge. Therefore, the interaction between finance, financial models and culture can be a differentiator in determining overall competitiveness of companies.