If your startup does business with larger firms, you’ve surely dealt with chief financial officers, who can make or break your sales pitch, give the “yes” to an investment plan, or offer insights at the end of the sales cycle. Therefore, it’s essential to get a feel for how those CFOs are thinking, and based on a recent survey, the results aren’t all positive.
CFOs at businesses of all sizes are losing optimism in the economy, and foresee a recession in the near future. That’s the word from the new Duke University CFO Global Business Outlook, which was released this week.
Duke’s Fuqua School of Business has conducted its survey of chief financial officers for 94 quarters straight, with insights from CFOs both in the US and across the globe. Escalon has combed through Duke’s recent report to find the most important insights for small- and medium-sized businesses, and we’re sharing them below to help entrepreneurs get a handle on the temperature of the current environment. Read on for the top five insights we gleaned from the report.
1. Majority of CFOs Grow Pessimistic
Duke reports that its CFO Optimism Index has historically been an accurate predictor of GDP and hiring growth, but the Index dropped over the most recent quarter, which could be a foreboding sign. Some 55 percent of CFOs have grown more pessimistic recently when compared to this year’s second quarter, eclipsing the 12 percent of CFOs whose optimism rose during the same period.
“Business optimism has not been this low since September 2016, a time when the unemployment rate was five percent,” said John Graham, the survey director and a finance professor Duke’s Fuqua School of Business. “Optimism is low in all regions of the world, which exacerbates any slowdown occurring in the US.”
The level of optimism on a scale of zero to 100, based on geographic region, is as follows:
- United States: 63
- Europe: 59
- Asia: 51
- Latin America: 41
- Africa: 39
2. Recession Woes Deepen
A growing number of CFOs across the globe believe that their economies are headed for recession, with 53 percent of those in the US expecting an economic downturn to hit by the third quarter of 2020.
Fears are even deeper in other parts of the world, with the following percentage of CFOs expecting to hit a recession by the third quarter of next year:
- Africa: 81 percent
- Asia: 72 percent
- Europe: 69 percent
- Canada: 68 percent
- Latin America: 65 percent
CFOs not only examine the probability of a recession to prepare their organizations for funding changes, but also so they can make strategic decisions about the future.
“Executives don’t want to be caught unprepared for the next recession like they were in the global financial crisis,” said Campbell Harvey, a founding director of the survey and a Duke finance professor. “There are plenty of warning signs and now is the time to be prudent. Who wants to put their firm at risk by increasing borrowing to fund a major new project when a recession could be on the horizon? It is no surprise that capital expenditures have dried up.”
3. These Are CFOs’ Top Concerns
When asked about their most pressing topics during the most recent quarter, US CFOs cited the following as their top ten concerns:
- Economic uncertainty: 47.3%
- Difficulty attracting/retaining qualified employees: 44.2%
- Government policies: 36.2%
- Data security: 26.8%
- Weak demand for products/services: 24.6%
- Cost of benefits: 23.7%
- Regulatory requirements: 21.9%
- Rising wages/salaries: 21.0%
- Employee productivity: 18.8%
- Access to capital: 12.1%
As noted above, staffing issues rank second on the list, following only economic uncertainty among executives’ main concerns. “CFOs are frustrated about not being able to hire workers with skills that are well-matched to their job openings,” Graham said. “Worker shortages are occurring at varying skill levels.”
4. ROI Among Most Important Investment Considerations
When determining whether to make large investments, small- and medium-sized businesses ranked a variety of factors among the most important considerations that they use. However, return on investment (ROI) seemed to be at top of mind for these CFOs.
Following are the most important factors that small businesses (revenue up to $99 million) use in analyzing whether to pursue large projects:
- Payback period: 30% considered this very important, while 44.6% described it as important.
- ROI: 30.5% ranked it very important, and 35.1% considered it important.
- Internal rate of return: 26.1% considered it very important, while 37.3% ranked it important.
- Net present value: 10.1% named it very important, and 16.3% ranked it important.
When medium-sized businesses ($100 million to $1 billion in revenue) were asked the same question, they used the following considerations when evaluating large projects:
- ROI: 58.0% considered it very important, while 26.0% ranked it important.
- Payback period: 50% considered it very important, and 32.0% ranked it important.
- Internal rate of return: 50.0% rated it very important, while 30.0% considered it important.
- Net present value: 31.9% considered it very important, and 21.3% ranked it important.
5. Capital Spending Slows
When asked about their capital spending plans, American CFOs projected an increase in capital spending of less than one percent over the next year, marking the lowest growth since September 2016, the report indicates.
Europe is expected to boost capital spending by the most at five percent, followed by Latin America at three percent. No growth is expected in the Asian market, with a minus four percent growth rate projected in spending in Africa.
Resource: To read Duke’s entire report, visit the CFO Survey website.