There is good news for finance executives. Today, they seem more optimistic than they have in many months. In fact, more chief financial officers (CFO) are focused on growing their companies than at any time in the past two years, according to a recent EY survey. But are their companies doing enough to get ahead of their competitors? This is a tough question that bears asking.
In fact, 55% of CFOs say that growth is now their company’s main focus, the most since 61% reported this in October 2011. Only one-third (35%) report they are concentrating on maintaining stability. This data comes from our most recent EY CFO Capital Confidence Barometer report. Every six months, we poll a group of more than 1,600 executives in 72 countries about their outlook on the economy and their capital management strategies. Among them is a subset of 356 CFOs.
These CFOs are more optimistic because of an uptick in the global economy. Six in ten finance executives feel that the global economic outlook is improving, contrasted with just 26% who said this when polled last October. CFOs are more upbeat today about important economic indicators such as economic growth, access to credit and hiring.
Most CFOs expect moderate growth in the global economy over the next year. Two-thirds of them think the economy will grow 1% to 3%. But there are indications they are increasingly buoyant. Nearly one-quarter (22%) of them predict the global economy will rise 3%-5%. Just six months ago, only 14% of them felt this way.
Optimizing the Capital Structure
This confidence is prompting more CFOs to optimize their capital structures for future growth. This includes an increasing desire to access the credit markets, refinance their obligations, pay down debt and even look to make strategic deals.
Exactly half of CFOs consider credit conditions to be improving around the world, compared to just 28% one year ago. It is safe to say that better access to capital in general is now a defining aspect of the current and forward-looking business environment. This trend gives CFOs more options.
Today, 36% plan to make refinance loans or other debt obligations, compared to just 27% in October 2012. Why are they refinancing? Nearly half (46%) say they plan to retire mature debt; only 11% had these plans one year ago. Meanwhile, 22% will do it to optimize their capital structure, and another 20% will extend the maturity of short-term debt. CFOs are clearly intent on strengthening their balance sheets.
As CFOs grow more optimistic about their access to credit and their ability to tap the debt markets, at the same time they report improvement in the mergers and acquisitions (M&A) outlook. Two-thirds (67%) anticipate more global deal volume over the coming 12 months. Relatedly, CFOs are more apt to use debt to finance these deals. Thirty-six percent say their chief method for financing deals over the next year will be debt. This figure was 31% six months ago. Nearly half (48%) report they will mainly use cash.
Are Companies Doing Enough to Grow?
In spite of their higher optimism, when we dig deeper into the latest data from CFOs, it bears examining whether corporate executives are being aggressive enough in their growth agendas. Overall, this group appears to be following a very disciplined path to growth. However, discipline and conservative are not synonymous. For some companies have these blurred? Can more assertive organizations taking calculated risks gain a competitive advantage?
When asked to list the boardroom agenda of their organizations, many executives in our poll say that there is a greater focus today not on growth, but on risk management, efficiency and cost control. In fact, they say that growth into new markets and growth via innovation/research and development (R&D) fall to the bottom of our nine-item list.
Moreover, just 44% of CFOs say that they plan to invest capital over the next year, and only 45% report they will be using excess cash to fund growth. It comes as a surprise that only 17% of CFOs say their companies will be developing new sales channels over the next year, and just 15% plan to exploit technology to develop new markets or products.
As for strategic growth, while two-thirds of CFOs predict that global deal-making volume will rise over the next year, only 28% of them say they will actively pursue acquisitions in the near future. The deals that CFOs plan to make seem to be of the “safer” variety, adding incremental value rather than strategic game changers. They are looking for targets in markets they already know.
According to the poll, 61% of CFOs will attempt to grow share in existing markets, versus 54% examining new regions or product sectors. Relatedly, most CFOs expect to deploy only a small portion of their acquisition capital to Brazil, Russia, India and China (BRIC) emerging markets or non-BRIC emerging markets. While these deals usually carry more transaction risk and thus require more rigor, CFOs should not overlook the potential for strategic moves into fast-growing yet stable economies.
Certainly it is important that CFOs manage risk and maintain a strong balance sheet with the global economic troubles of just a few years ago fresh in mind. Operational risk mitigation is vital.
However, we don’t believe risk management and growth are mutually exclusive—in fact, just the opposite. The more effective an organization is at enterprise risk management (ERM), the faster they should be able to put capital to good use to innovate and expand. Think about Formula 1 racing. These cars have some of the highest performing brakes (ERM), which enable them to go extraordinary fast on the right parts of the race course in the right conditions. Is now that time for CFOs? The answer will vary by industry sector and individual company.
Are CFOs Too Restrained?
The lessons here from the latest CFO viewpoints are clear. The worldwide economic outlook is better than it has been for some time, yet many CFOs and their executive colleagues remain restrained. Perhaps too restrained? Certainly a vital strategic task of the finance group is to mitigate risk. However, CFOs should also continually be scanning for opportunities to transform and grow the business.
By taking bold but carefully orchestrated action, companies can drive growth and win a competitive advantage over the long term. Yes, there are storm clouds over some areas and industries, but there are also regions and markets where the fundamentals appear solid. The executives who are able to identify and take action in these areas can position their companies for a brighter future.
Tom McGrath is the senior vice chair – accounts with Ernst & Young LLP, a provider of assurance, tax, transaction and advisory services.
