What History Teaches FP&A About The Future

May 11, 2021

They say that past performance is never a predictor of future performance. Is it real or simply a disclaimer? In stable businesses you can often do incremental planning meaning that the coming period will not look much different from previous periods (taking seasonality into account). However, as the world continues to change at a faster pace and many industries are facing an uncertain business environment, we can easily question how much past trends will predict the future. 

In any model you would create to predict future performance though, historical trends are bound to play into the picture. Even in unstable times, you can draw on past events that created instability. In its nature the financial crisis was of course much different from that of COVID-19, however, much can be learned about how the world operates in a crisis. Even more local or regional health crises like SARS can be used to predict future outcomes when dealing with a pandemic. 

Nothing can predict black swan events by definition but still, it would be ill-advised to write off historical trends based on that notion. After all, these events are not expected to occur often. Hence, let us look closer at how companies today can use historical numbers to predict their future performance. 

History repeating itself 

Let us continue discussing the pandemic and what we can learn from the past. You might be familiar with the “roaring twenties” essentially describing the world in the aftermath of the Spanish Flu. This like COVID-19 had also laid waste to the world but led to a significant counter-reaction when bottled-up demand was unleashed in the re-opening of society. Could something similar happen now? Absolutely, as many people are keen to start going out to restaurants, traveling, and participating in events. 

We should also remember that the roaring twenties ended abruptly on Black Thursday 24 October 1929 with the crack on Wall Street and was followed by the Great Depression. Eventually, it all culminated in World War II. Essentially, we have seen all current events unfold in various shapes and forms in the past which should give us many indications as to how to predict the future. We probably need some more structure to do it though. Here are some things to consider. 

  • Identify the overall key indicators for your business (e.g., GDP, consumer sentiments, manufacturing output, port lifts in container terminals, global inventory, etc.)
  • Study how these indicators performed during similar situations in the past
  • Create action plans for what to do in various scenarios (it can be helpful to create what-if scenarios on your numbers to simulate potential impacts)
  • Set up real-time tracking of the indicators to identify early on when history starts to repeat itself
  • Trigger your action plans when needed to take a proactive approach to significant events impacting your business 

There are always things that you cannot plan for and did not cover in your what-if scenarios. Hence, regardless of what you do, it is important that you build agility into how you run your business. 

Are you ready for what comes next? 

No one can tell with certainty how the future will unfold. However, companies that take a proactive approach will be more ready than others. For this purpose, we should learn from history wherever applicable. Today it is COVID-19 that we are dealing with. Two years ago, it was Trade War, and three years ago Brexit. 

There will always be events of smaller or larger magnitude that will disrupt our business plans. With every event, there are threats and opportunities. Prepare well and you can mitigate the threats and take advantage of the opportunities. During COVID-19 those businesses that could switch to a virtual operating mode fast did much better than those that were fully dependent (at least by their own perception) on a physical product. I wonder if some of those businesses had already done what-if scenarios on an all-virtual world. 

History will be one among many inputs that we should use to try and predict the future. While historical events might repeat themselves they will do so in a new context. For instance, the world is much more connected now than during the Spanish Flu. This leads to more spread of the disease. On the flip side, the global healthcare system also works much more effectively limiting the fatal consequences of the pandemic. That means we always need to consider our current context when evaluating historical events. Yet, it does not make them less relevant. 

How are you predicting the future and what role do historical events and numbers factor into the process? Do you try to model for instance the impact of the Spanish Flu vs. COVID-19 and do action planning on the same? What other inputs besides history are you using for your forecasting? Remember, the better we forecast and the proactive we become the better we can handle any future unexpected events. Are you well-equipped to handle those events?

This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.

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