Given the growing number of portents, it’s hard to avoid the conclusion that the coming year will be a notably tough one for business.
Wise CFOs will already have been responding according to their company and sector needs. However, the tenor of these responses is markedly more towards a defensive position, rather than expansionary. It’s all about cost reduction.
That’s small wonder. As Deloitte’s autumn 2022 European CFO survey suggests, CFOs are feeling “an all-time high” in their financial and economic uncertainty, topping the previous all-time high of spring 2022. In the UK, 57% are pessimistic about the financial prospects for their companies and sectors. Only a bold 13% say they’re optimistic for 2023.
So far, so gloomy. “But there’s still scope to be optimistic,” says Knut Ronning, CFO of financial software company Xledger. “The business environment that will shape the coming year can create good opportunities, too. It’s a great time for acquisitions, for example. That’s not to say the situation isn’t demanding. You still have to make your value proposition very clear.”
1. Coping with complex systems
An unprecedented confluence of inconclusive macro events – domestic economics and political uncertainty, Ukraine, Covid-related supply chain disruptions, energy insecurity and climate change – makes 2023 exceptionally hard to read.
“In the past, CFOs would be dealing with some of these forces, but not all of them at once, and that means we’re in uncharted territory,” argues George Giannetsos, CFO for training company PeopleCert. “I think that means limiting attempts at understanding to one key question: how deep will the recession be, and for how long?”
“The key task for CFOs, more than ever, will be to prepare for the unexpected. This interaction of complex systems gives rise to non-linear results,” adds Michael Taylor, economist at Coldwater Economics. “That gives the year ahead a volatility that is incredibly hard to analyse. The only reasonable response is to prepare a company’s finances accordingly.” Cut debt and keep cash flow tight, he recommends.
That’s perhaps all the more important given the often-conflicting signals: significant interest rate rises and recession, yet 4% growth for the UK, a tight labour market and strong margins, until recently. “We may see interest rates come down, sure, but then we may see huge inflation if Ukraine really does blow up, or complete deflation if the economy goes into depression,” Taylor adds. “The problem is we have no idea.”
2. Protecting margins and balance sheets
“The biggest challenge will be coping with this environment of high costs, rising interest rates (domestically and abroad) and contracting growth, with the Bank of England predicting recession lasting until mid-2024,” argues Ian Stewart, chief UK economist at Deloitte.
Deloitte identifies cost reduction and building up cash reserves – “defensive balance sheet strategies” – as the top CFO priorities, as was the case in 2009 and 2020.
With cost increases baked into negotiations with suppliers – many of which will now look for more frequent resetting of their terms – many markets will become much more price-sensitive. CFOs will need to either limit cost increases by locking in longer-term supplier agreements, for example, or cutting their unit costs. They could also revise prices upwards, trickier still given uncertain inflationary pressures.
This is likely to require a laser-like focus on cash flow or the good fortune to have high margins. The traditional tactic of keeping prices lower than the competition to win market share will not be an easy card to play. It’s also going to mean playing hard ball with less dependable customers by limiting credit or locking down more stringent terms of trade, while offering discounts to early payers.
3. Acquiring and retaining talent
A September 2022 survey from Gartner Finance suggests that finding talent is the top challenge facing CFOs this coming year. Of course, economic pressures will see many CFOs cut back on hiring. However, “creating uncertainty [this way] can have quite the opposite to the intended effect in filtering through a company’s culture, trust and brand in a way that can take years to re-establish, if at all,” warns Jordan Relfe, CFO of property services company Lifeproven.
“You need more openness and honesty with your team to garner the resilience that challenging economic times require. That translates into the quality of work, and in turn generates more work,” Relfe adds.
But even those who don’t cut back face a shortage of skilled labour because of Covid. Firms must still deal with trends like the great resignation, a less-mobile workforce and a shortage of the right skills. CFOs face difficulty finding employees with their current preference for more traditional problem-solving and strategic business thinking skills, rather than those adept at technology.
Finance chiefs will need to reassess recruitment efforts to ensure that critical roles are prioritised and to detect the talent already available in-house. All of this increases the competition for talent and creates an upwards pressure on wages, with inflation further complicating the situation in terms of stabilising and setting wage levels.
But higher wages alone won’t solve the problem, especially in the broader context of low employee morale. Employers will need to look anew at their employee value proposition, with a view to making it more human-centred and flexible. There will need to be greater opportunity for growth, with budgets allocated accordingly. This is particularly the case as diversity, equity and inclusion becomes a competitive differentiator between employers.
4. Raising capital
Rising interest rates and the impact on the cost of business borrowing and on the willingness of lenders to offer appealing terms can only encourage CFOs to reassess the need for alternative sources of finance. Indeed, according to Deloitte’s survey, CFOs now rate credit as more costly than at any time since 2010.
This is especially the case if borrowings are due to mature over the next three years, during which a doubling or tripling of interest rates and a consequent outflow of company cash is not impossible. Taking the long view and sounding out potential investors sooner rather than later is wise, but so is developing the coldly realistic position of a readiness to give up full ownership of the business.
Keeping funds within the business by postponing planned dividends, for example, may be a necessity; so could cost savings through greater energy efficiency and so on. But it’s also a signal of the company’s longer-term stability.
Deleveraging is also an option in this climate, says Taylor. “This might even be the time to try to diversify your portfolio because the risks are so high in any particular sector,” he advises. “The return on capital might not be great but at least you survive.”
5. Finding focus
Limited resources means those remaining must be utilised with better efficiency than ever. The question, suggests Ronning, is how to bring focus on your business’s key drivers “to allow a pause on those less critical projects”.
This requires improved analysis and actionable understanding of the business’s processes. Investment in software solutions is a start, but also recruitment that allows more day-to-day senior management tasks to be offloaded to permit greater concentration on what’s vital.
Dedicating resources to greater intelligence at this time may feel counterintuitive, given the tendency to reduce commitment to large investments. However, as the 2008 recession suggested, investment can ready a company for rapid growth once upbeat economic conditions return.
Better performance management information – in part by strengthening partnerships between sales, products and supply chain managers – could prove essential to growing profits and underpinning customer relations. Improving data through a bolder approach to digital technologies, automation, machine learning and IT processes can also drive smarter and often real-time decisions.
