According to findings of the recent Deloitte CFO Signals Survey in Q3 2021, Chief Financial Officers (CFOs) have become a bit more pessimistic about business as they have lowered their expectations for revenue, earnings, capital spending, and dividend growth, but have raised them for domestic personnel, wages and salaries. Nearly half say supply chain disruptions have increased their costs by 5 percent or more, with 60 percent saying shortages and delays have reduced 2021 sales already or will do so by year-end.
Seventy-eight percent of CFOs rated the current North American economy as good, up from 75 percent in 2Q21; while 54 percent expect conditions to be better a year out, a decline from 62 percent in the prior quarter. Compared to three months ago, 66 percent of CFOs are more optimistic about their companies’ financial prospects, down from 75 percent in 2Q21.
Talent and labor concerns dominated internal risks, while COVID-19 and its variants ranked as chief external risk concerns. Some 46 percent of CFOs noted they expect as much as 10 percent of their organizations’ growth in the next three years to come from mergers and acquisitions (M&A), while 40 percent said M&A will fuel 11 to 30 percent of their companies’ growth.
CFOs’ top three areas of M&A focus are selectively considering acquisitions only if price and fit are favorable (52 percent of CFOs), seeking inorganic growth (49 percent), and maintaining competitive positioning (46 percent). Finance support models for M&A were found to be: more than half (58 percent) of CFOs rely on finance talent who are highly trained in M&A, a dedicated M&A finance function (36 percent), part-time leaders for deals (34 percent), and standard playbooks and templates (30 percent), as well as on-call advisors as needed (46 percent). As for biggest challenges related to M&A, 58 percent of CFOs cited valuation of assets/difficulty of financing as their top challenge, followed by integration/divestiture execution (55 percent), and translating business strategic needs into an effective M&A strategy (44 percent).
CFOs were also surveyed on their perceptions of the future status of regional economies. Responses showed that 54 percent of CFOs expect North America’s economy to be better a year out, down from 75 percent in 2Q21. Regarding CFOs’ views on risk appetite and the capital markets, 65 percent of CFOs indicated now is a good time to be taking greater risks, the same as last quarter. Eighty-two percent of CFOs now say that US equity markets are overvalued, a dip from 86 percent in 2Q21. Ninety-two percent consider debt financing attractive; 55 percent say the same for equity financing, both similar to last quarter.
CFOs’ growth expectations for key operating metrics over the next 12 months declined in all metrics except for domestic hiring and domestic wages. Revenue growth expectations declined to 8.5 percent from 9.6 percent in 2Q21. Earnings growth dropped to 12.6 percent from 13.6 percent; capital spending to 8.8 percent from 12.4 percent; and dividend growth to 3.8 percent from 4.0 percent.
Conversely, growth expectations for domestic hiring rose to 4.8 percent from 4.1 percent in the prior quarter, and domestic wages/salaries increased to 4.3 percent from 3.4 percent in the prior quarter. Some 45 percent of CFOs also said they would increase their capital allocation for North America.
CFOs’ sentiment for their companies’ financial prospects, when compared to three months ago showed that the optimism index fell from last quarter’s +70 to +59, with 66 percent of CFOs expressing rising optimism, down from 75 percent in 2Q21. The most worrisome internal risks for CFOs were found to be talent and labor, retention, strategy execution, and return-to-work planning, followed by rising costs and cybersecurity. COVID-19 and its variants were overwhelmingly the most frequent response regarding external worries, followed by inflation, regulation, and supply chain.
The effect of supply chain shortages and delays were found to be increased costs of 5 percent or more, cited by 44 percent of surveyed CFOs, 32 percent say 2021 sales have fallen, and 28 percent expect future sales to suffer this year. For 32 percent of surveyed CFOs, supply chain shortages or delays have not had a substantial impact on their costs, and 29 percent noted they do not expect future sales or revenue this year to be affected.
In terms of most worrisome supply chain risks, 69 percent of CFOs indicated cyber risk, followed by operational risk (60 percent) and geopolitical risk (56 percent). When surveyed on the topic of change in supply chains within the next three years, more than two-thirds of CFOs (69 percent) indicated an increase in the diversification of their supply chain sources, and 23 percent expect greater vertical integration within the next three years, along with decreases and increases in sourcing by region.
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