Savvy leaders in the C-suite continue to invest in digital transformation that fuels net-new growth, regardless of global economic volatility concerns. Other leaders, consumed by fear, are undecided or already retreating.
Rising prices and interest rates along with other economic factors beyond a company’s control are leading CFOs to show the most concern about profitable growth, inflation, and balance sheet health in 2023, according to the latest market study by Gartner.
Yet nine out of 10 CFOs plan to fund organic growth in 2023 at the same level or greater levels than their investment in 2022.
Digital Growth Market Development
"Macroeconomic factors that companies can do little to nothing about have created an uncertain setting in 2023, and have also led to many sleepless nights among CFOs," said Shannon Cole, senior director at Gartner.
Borrowing has become more expensive, and inventory and fixed-asset values remain volatile, which inevitably leads to downstream income statement risk.
According to a Gartner survey of 110 CFOs, 82 percent of respondents cited profitable growth among the top five issues that keep them up at night. Seventy-three percent of CFOs picked inflation in their top five, and 68 percent noted balance sheet health.
In the current environment, CFOs should look to aspects of the business that can be managed in a more cost-effective manner. This can include achieving structural cost optimization by renegotiating with office landlords, collaborating with the CIO, and partnering with the CHRO.
Gartner found 57 percent of CFOs are more likely to use capital to fund organic growth compared to 2022. In addition, 80 percent of CFOs will hold at least the same amount of excess cash in 2023 to enable organic growth investments.
CFOs are also focusing on debt pay down in 2023, with 41 percent indicating they would pay down more than they did in 2022.
In the current environment, Gartner experts state that reinvestment of operating profit is a less risky and less expensive source of funding.
"CFOs often find themselves in a balancing act between satisfying shareholder returns in the short term and building the company’s long-term resilience," said Cole.
They’re finding that CFOs are prioritizing incremental investments in organic growth and debt pay down, and they are more likely to allow cash to accumulate before deciding where best to deploy it.
However, 55 percent of CFOs are less likely to take on new debt, which not surprisingly is due to the rising cost of debt. Only 18 percent of CFOs expect to take on additional debt to a greater extent than in 2022.
While 42 percent of CFOs will maintain their share repurchase strategy this year, 44 percent are less likely to use share repurchases to the same extent as in 2022.
"The rising cost of debt is forcing many CFOs to scale back taking on new debt. However, CFOs can maximize flexibility for growth investments by fine-tuning their capital allocation strategy to address changing conditions in cost of capital and asset valuations," said Cole.
Outlook for Digital Growth Investment Trends
CFOs surveyed by Gartner expressed general cost nervousness and are most concerned about rising labor costs. Seventy-six percent of CFOs across 25 surveyed industries expressed the highest levels of concern over labor costs compared with non-labor input costs and G&A costs.
"The scarcity of general labor availability driven by lower workforce participation rates, human-centric work policy expectations, and the high demand for digitally skilled workers have led to a job market where companies are competing aggressively on their open roles, and this naturally drives increases in labor rates," concluded Cole.
That said, I believe the market visionary leaders will, once again, use the current economic environment to make a quantum leap ahead of their peer group. In contrast, the most conservative leaders will choose to cut back and retreat from pursuing any new growth. This is the somewhat predictable and inevitable outcome of global recessions.