North American CFOs, wary of regulation and talent issues, continue to push for growth

Some North American CFOs expect their companies to make significant changes to business lines, strategies and risk-management practices in a search for earnings growth.

Finance chiefs in the latest quarterly CFO Signals survey by Deloitte have lower expectations for sales, earnings and capital spending, but they don’t plan to sit still. Change is on the horizon – in several forms.

Twenty-three per cent expect a major change in fundamental business strategy, 21% foresee a substantial merger or acquisition, and 33% expect significant improvement in risk-management approach.

The survey of 109 CFOs from the US, Canada and Mexico shows a year-over-year decline in optimism from finance chiefs about their own companies. About 60% of the pessimism comes from external factors such as increased regulation.

Net optimism (the percentage of respondents who are more optimistic minus those less optimistic) is plus-27, down from plus-33 last quarter and plus-32 a year ago. CFOs in Canada and Mexico were more optimistic than those in the US.

A broader survey by the AICPA released last month shows a slight rise in sentiment among US finance professionals. The overall CPA Outlook Index, a measure of nine equally weighted factors, rose to 70, up four points from the previous year.

In the Deloitte survey, the retail and wholesale sector is overwhelmingly pessimistic, with negative net optimism for the next year. That’s in contrast to the health-care/pharmaceutical and energy/resources sectors, which are plus-45 or higher in net optimism.

Focus on talent

CFOs list availability of talent (39%) as the top impediment to their companies’ success, followed by industry-specific regulation (36%) and cost of talent, including wages and benefits (35%).

Deloitte asked respondents about their finance teams to better learn about CFOs’ talent development. The typical CFO has seven direct reports, five men and two women. One of those direct reports, according to the survey, will be CFO-ready within a year, and 88% of CFOs have at least one direct report who will be CFO-ready in one to three years. Seventy-eight per cent say that at least one man will be ready in that time, and 38% say at least one woman would be.

CFOs expect declines in sales and earnings growth compared with a year ago. They projected earnings growth of 12.1% in the first quarter of 2013, in line with typical first-quarter optimism in previous years, but that dipped to 7.9% for the most recent quarter. Sales growth projections, which have a survey mean of 6.4%, were 5.4% a year ago and 4.6% for the first quarter of 2014.

Despite their hesitance, most CFOs “indicate a bias toward growth over reducing costs and toward pursuing opportunity over limiting risk,” the survey said. Fifty-one per cent of capital spending is pegged to growth and innovation, with most CFOs saying they prefer a targeted approach to growth instead of investing in multiple growth initiatives.

Other survey highlights:

• CFOs list China as the country other than the US that is most important to their companies’ growth prospects. China is in the top three for 43% of North American CFOs and 48% of US CFOs. Twenty-nine per cent of US CFOs said the UK was important, followed by Brazil (27%), Mexico (20%) and Germany (19%).
• North American sentiment about the economy in Europe rose, with far fewer pessimists than in previous quarters. Additionally, 29% cite economic growth in Europe as a driver of future company success.
• While projections for sales and earnings growth declined, they rose for dividends (3.6% in the first quarter of 2013 to 5.7% in 2014). The manufacturing sector led the way with a 9.1% projection.
• Capital spending growth projections of 6.5% (down from 7.8% a year ago) are hindered by Canada and the US (4.7% and 6.1%, respectively) but bolstered by Mexico (13.4%).
• Among the 75 US respondents, two-thirds say they expect to increase their focus on health and wellness in response to health-care reform laws. Additionally, 60% expect to pass health-care costs on to employees, and 12% plan to pass costs on to customers.

Related CGMA Magazine content:

“Regulatory Issues Requiring More Attention From Some CFOs”: Twenty per cent of US CFOs reported in a new survey that it has become more challenging to manage their firms’ compliance-related initiatives in the past 12 months.

“US Offshoring Targets New Destinations”: Asia no longer tops the list of places where US tech companies plan to create manufacturing jobs, research by BDO suggests. Find out where the tech industry is looking to offshore next.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.