Weathering the storm

Does this mean accountants should be tapping their barometers instead of their calculators?

Not necessarily. But it does mean they may find it worthwhile spending a little time looking into how the weather impacts on their company’s bottom line and what they can do about it.

Accountants who worry about defending their turf should be concerned.

There are clear signs that functions, such as marketing, sales and purchasing, are already waking up to the potential of weather-informed business planning.

The Met Office reckons the weather could have a material impact on 70% of UK companies. It puts the annual cost of weather-related losses at £7.6bn. That includes £2bn for late or absent staff, £1.9bn for missed deadlines and £560m for unplanned overtime.

Companies fork out around £300m a year in penalty payments for late delivery caused by the weather. Around one in five admit they’ve been caught out with either too much or too little stock because of unexpected weather changes.

Just knowing what the weather is likely to do is not much use on its own, admits Jonathan Hearth, the Met Office’s marketing director. That’s why it is helping companies to model the impact of weather on sales of individual products.

The Met Office is already working with national clothing chains to match weather data to sales data and look for correlations, and is able to do this on a store by store basis. Recently, supermarkets have started to look more closely at such modelling. For example, they have discovered that when the weather gets warmer, customers buy fewer ready meals and sandwich sales rise.

Not too surprising, perhaps, but where this kind of work has become more sophisticated, it is able to predict with remarkable accuracy how sales of specific products will respond in different weather conditions. For example, for every degree centigrade over 18, soft drinks sales rise by four times the rate they were rising for each degree rise below 18. But when the temperature exceeds 24 degC, sales fall as people find carbonated drinks no longer quench their thirst.

This kind of work is even able to predict which types of drinks people will buy. Many choose colas or fruit squash when the temperature reaches 15 degC, but switch to bitter lemon at 19 degC.

The weather is one of the biggest single factors affecting human behaviour, so it’s a safe bet there are thousands of similar correlations waiting to be discovered.

The same principle applies in the public sector. The Met Office has been working with the NHS to find correlations between weather and health, ie four days after a cold snap, there’s an increase in heart attacks.

Hearth says the real benefits from this work come when it is merged with data about disease patterns in the country. Using this approach, the Royal Berkshire Hospital saved £420,000 in the two weeks over one Christmas period because it didn’t have to clear wards and put surgery out to the private sector after the Met Office predicted that there wouldn’t be the usual upturn in seasonal illnesses, such as flu, because of a combination of weather predictions and disease patterns.

It’s even possible the old autumn excuse for late-running trains – leaves on the line – could be heard less in future. The Met Office is working with Network Rail to build a model to predict within hours when the main leaf-fall will occur so clearing equipment can be used.

Companies that want to factor weather into their business planning may want to use short or long-term forecasts or a combination of both.

Hearth explains: ‘We can now be deterministic and say accurately what will happen within three days, and fairly accurately within five.’

The North Sea energy industry uses short-term forecasts to plan sailings of supply vessels and call centres use short-term forecasts to plan staff rostering when demand is likely to be affected by weather – such as calls to an insurance company after a storm.

Long-term forecasts go as far as three months. Hearth says: ‘We tend to prepare a long-term forecast on a bespoke basis. So if a clothing store wants to know what the autumn weather will be like, we’d give a probabilistic forecast for a range of temperatures and precipitation.’

When a weather-affected project is underway, it’s possible to save big money by taking a reliable forecast.

Stratus, the consortium building the Met Office’s new headquarters near Exeter, used information from a forecast to bring forward the water-proofing of the site before a prolonged spell of rain.

Some companies, where weather can make a big impact on the bottom line, are turning to weather derivatives – financial instruments designed to enable a company to hedge its exposure. Early adopters are energy companies that hedge loss of revenue from warmer than expected winters against the extra profits from cold winters. But any company that suffers loss from adverse weather could use derivatives as a hedge.

Negotiating a weather derivative involves a kind of financial balancing act in which you trade away some of the profit made when the weather is favourable for compensation when the weather is bad. Essentially, it’s a tool for smoothing cashflow and reducing the cost of weather loss over time.

But a company that wants to do this will need plenty of hard financial information about how its business is affected by weather. So there may be a bit of both calculator and barometer tapping after all.

  • Peter Bartram is a freelance journalist.

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