CFOs balance growth and cost control

 

Finance leaders are walking a tightrope as they help their organizations navigate rising interest rates and high inflation.

 

Their encouraging views in Grant Thornton LLP’s CFO survey for the third quarter of 2022 show that optimism has risen slightly over the previous quarter. And by almost a 2-to-1 margin, CFOs forecast net profit growth at their own organizations over the next year.

 

But finance leaders have plenty of sobering thoughts as well. They view cost optimization as their most urgent course of action, and they are concerned that their organizations won’t be able to attract and retain the right people to fully support their operations.

 

“The companies that I’m talking to all are focused on cost reductions,” said Sean Denham, National Audit Growth Leader for Grant Thornton. “Whether it’s through headcount or other means, that’s what they’re focused on. Usually when people are focused on cost reductions, it’s because they don’t have a positive outlook on the future.”

 

And yet, the outlook isn’t quite as bad as it was in the previous quarter. Forty-five percent of CFOs said they are optimistic about the outlook for the U.S. economy, while 31% were pessimistic. The 45% optimism result was up from 39% in Q2, but still far below the 69% optimism recorded in the third quarter of 2021 before inflation and rising interest rates began buffeting the U.S. economy.

 

 

 

Demand shift may be imminent

 

Optimistic CFOs say the economic impact of the COVID-19 pandemic is waning (71%) and that increased household wealth will continue to drive demand. But that demand may be greater for goods and services with budget-friendly prices that consumers see as necessities, whereas luxury items may see a decrease in demand.

 

“Some consumers are trading down brands because they’re afraid that their wealth won’t buy them as much,” said Enzo Santilli, Grant Thornton’s National Managing Partner for Transformation. “They’re still buying things, but they’re buying things that are cheaper or lower quality, and the effects of that will vary by sector.”

 

Shortly after the closure of the CFO survey, which was in the field for the last two weeks of October, Twitter cut more than 3,000 jobs and Meta announced a reduction of more than 7,000 jobs.

 

These moves reflected the top areas of focus in the CFO survey, as 58% of respondents listed cost optimization among their top three priorities for the next six months, and 40% chose workforce rationalization as one of their top three objectives.

 

Nearly one-third (32%) said they could potentially introduce layoffs or workforce reductions in the next six months as a result of the economic downturn.

 

Some M&A activity could be affected in a positive way because the recent economic downturn has the potential to put the brakes on climbing valuations with respect to new investment opportunities. Chris Schenkenberg, National Managing Partner, Regional Tax Business Lines for Grant Thornton, recently asked several private equity professionals their views on rising interest rates and the impact on deal values, the cost of capital, and the overall M&A market in general.

 

“The sentiment is that M&A volumes are down year over year,” Schenkenberg said, “and while rising interest rates certainly affect the cost of capital and investment models, recent decreases in valuations and multiples affects them positively in some industries.”

 

 

 

Supply chain remains a challenge

 

Meanwhile, supply chain reached a seven-quarter high as an area of focus in Q3 of 2022 as 41% of CFOs rated supply chain as a top-three challenge.

 

Stockpiling inventory became an answer to the previous supply chain difficulties. But that’s a more expensive option as the cost of capital continues to rise.

 

“When the cost of capital was close to zero, they could put all the inventory they want in their warehouses,” Denham said. “Now that interest rates are going up, they have to decide whether to increase inventory because of potential supply chain issues. The cost of that is going to be a factor.”

 

 

 
 

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