European Financial Woes Take Toll on Near-Term CFO Expectations
Continued fallout from the sovereign debt crisis in the eurozone, persistent unemployment, increasing social unrest and governments’ efforts to find effective solutions cast a long shadow over CFOs’ expectations for their companies in the fourth quarter, according to the most recent Deloitte CFO Signals survey.
The Deloitte quarterly survey – which tracks the thinking and actions of chief financial officers representing many of North America’s largest and most influential companies – shows only 27 percent of CFOs say they are more optimistic this quarter (compared to 29 percent last quarter and 60 percent back in the first quarter of 2011), and 38 percent say they are less optimistic.
Economic uncertainty was the most worrisome risk for almost all surveyed CFOs.
“CFOs are worried about the spillover effect from the European situation into global consumer and capital markets,” said Sanford Cockrell III, national managing partner, CFO Program, Deloitte LLP.
“They appear to believe that the longer we continue without effective solutions, the more likely and more pronounced the collateral effects will be on other established and emerging economies around the globe.”
In response, CFOs are striking a cautious tone toward their growth and hiring plans for the coming year. Specifically, CFOs are tempering their expectations for year-over-year revenue growth (6.3 percent this quarter versus 6.8 percent last quarter) and their projections for domestic hiring (1.0 percent from 1.2 percent last quarter).
On the bright side, CFOs have raised their projections for year-over-year capital spending (9.6 percent this quarter compared to 7.9 percent last quarter) and their outlook on earnings growth (10.1 percent versus 9.3 percent last quarter).
“Just 30 percent of CFOs expect their home economies to be in better shape a year from now and only about 10 percent expect conditions to be markedly better three years from now,” explained Greg Dickinson, who leads the Deloitte CFO Signals survey.
“The silver lining may be that, although CFOs have been steadily trimming their expectations since the first quarter of 2011, many of their earnings and investment projections are still positive year-over-year.”
Similar to last quarter, externally-driven pessimism is at the heart of CFOs’ gloom. Only 6 percent of CFOs say they are more optimistic for externally-driven reasons this quarter, down from 9 percent last quarter.
Unrelenting volatility and uncertainty are making it difficult for companies to provide earnings guidance. CFOs say their companies are increasingly choosing to provide conservative estimates (24 percent) or not to give earnings guidance at all (37 percent).
CFOs say their companies’ top three challenges include revenue growth from existing markets (54 percent, unchanged), framing and/or adapting strategy (41 percent, up from 34 percent), and prioritizing investments (39 percent, up from 18 percent).
Companies’ focus on revenue continues with 53 percent of companies’ strategic focus on revenue growth/preservation (35 percent on revenues in existing markets and 18 percent on new markets).
Approximately three-quarters of CFOs report that their boards have substantial influence on decisions related to strategic objectives and executive compensation. As for the risks they monitor, CFOs report a substantial board focus on strategic risk (66 percent), compliance and regulatory risk (48 percent), and financial risk (48 percent).
More than three-quarters of CFOs (77 percent) do not believe mandatory rotation of their audit firms would enhance auditor independence and objectivity, citing particularly strong concerns around internal costs, audit fees, and loss of managerial discretion.
The Deloitte CFO Signals survey was conducted for the fourth quarter of 2011. More than 75 percent of the CFO respondents were from companies with more than $1 billion in annual revenues, and more than 70 percent were from publicly-traded companies.
Each quarterly CFO Signals report analyzes CFOs’ opinions in five areas: CFO career, finance organization, company, industry, and economy.