What’s driving North American CFOs’ optimism

North American companies show a continued willingness to invest in growth initiatives over cutting costs because of internal optimism and external factors.

Regarding their companies, CFOs are confident in efficiency efforts established years ago, when cost-cutting was one way to squeeze out earnings growth. Today, CFOs are more focused on growing revenue and investing cash than on trimming costs and returning cash to shareholders.

Those are among the key takeaways from a quarterly survey of CFOs by Deloitte. The CFO Signals Report mainly polls finance chiefs from public companies with annual revenue greater than $1 billion.

“There’s a confidence that they’re going to be able to grow,” said Sandy Cockrell, managing partner for Deloitte’s CFO Program. “In terms of creating earnings growth through cost efficiencies and large enterprise cost reductions, a lot of that fruit’s been picked off the tree.”

Optimists outnumber pessimists by about ten to one in own-company optimism, a sentiment that has grown as CFOs feel more confident about taking on more risks. Additionally, CFOs have a more optimistic view of the economies of North America, Europe, and China.

In the survey, 52.4% of CFOs are more optimistic about their companies in the next 12 months, as opposed to 5.4% who are less optimistic. In the fourth quarter of 2016, 43.1% were more optimistic about the near future, and 19.7% were less optimistic.

The optimism mirrors that of another recent survey of finance decision-makers. CFOs and controllers expect companies to grow their staffs and invest more in employee training in 2018, according to the quarterly Business & Industry Economic Outlook Survey released last month by the Association of International Certified Professional Accountants.

The Deloitte survey was completed before there was clarity about the status of tax reform in the US. Now that the US Congress has enacted legislation that will reduce the corporate tax rate, companies should find more reason for optimism, despite the law’s complexity, Cockrell said.

“It allows companies to plan and adapt their strategies because they are starting to know what their tax position is going to be,” Cockrell said.

How US trade policies will change and how geopolitical events could affect business are other questions companies must deal with. But those potential disruptors do not rank as high in the minds of CFOs as the fast-moving change brought on by two trends: the growing power of data analytics and the potential for changing business models and product offerings, in addition to potential mergers and acquisitions.

This sort of rapid upheaval coincides with the changing role of the CFO, Cockrell said. He said CFOs have four main roles, the importance of which are changing every day. The four roles are:

• Operator, with a focus on efficiency and fulfilling the finance organisation’s core responsibilities.
• Steward, with a focus on protecting and preserving the organisation’s critical assets.
• Strategist, with a focus on providing leadership in determining business direction.
• Catalyst, with a focus on execution of the strategic and financial objectives.

Five years ago, CFOs spent the majority of their time on the first two roles. Now, that time investment has flipped. The CFO is not merely a part of the discussion on whether to pursue an acquisition or to enter an emerging market. “Many times, the CFO is leading those efforts,” Cockrell said. “Today, what we see is CFOs are spending 60% to 65% of their time in that strategist and catalyst role.”

CFOs in the survey said their top contributions to their companies’ planning processes were providing objective insight and analysis (58%) and getting capital allocated to the right initiatives and investments (51%). Capital allocation, Cockrell said, is one area in which companies can drastically improve.

“New CFOs can make a name for themselves by creating better and more robust capital allocation processes,” he said. “In this world of convergence, when a company might have to dramatically change its business model, the questions around where you’re going to make bets for investment get incredibly complex. That’s a place where CFOs are the nerve centre of that entire decision matrix. We see that happening at an ever-accelerating pace.”

Other findings in the survey:

• 84% of CFOs say that US equity markets are overvalued. That’s a new survey high, up from 70% who felt that way a year ago and 56% who had that view two years ago.
• Revenue is projected to grow 4.7% in the next 12 months, which is down from the previous two quarters but above the survey’s two-year average.
• Earnings are projected to grow 8.4% in the next 12 months, the second highest mark in the last eight quarters.

— Neil Amato (Neil.Amato@aicpa-cima.com) is a Financial Management senior editor.