Middle Market CFOs Pursue Aggressive 2020 Agendas

Most midsize companies are moving forward with their growth plans, despite weighty issues finance chiefs face in their respective industries.
David McCannFebruary 4, 2020
Middle Market CFOs Pursue Aggressive 2020 Agendas

Many middle market companies, relatively unfazed by the specter of recession and ongoing international trade tensions, aren’t opting to playing it safe by socking away cash and scaling back expansion plans, a new survey shows.

In a poll by BDO of 700 finance chiefs at U.S. companies with revenue between $250 million and $3 billion, more than half said they will move forward this year with digital transformation plans (54%) and product or service expansions (53%).

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Four in 10 (41%) said their companies will be expanding geographically, and a quarter said they anticipate growth via mergers and acquisitions this year.

The survey participants — half at public companies, half at private ones — expect to see a return on those investments, as 81% predicted their revenue will increase in 2020, while 77% said the same about profits. More than half (54%) said revenue will rise by at least 10%, and 45% forecasted that profitability would gain by at least that much. (See chart.)`

Between 58% and 62% of the CFOs said they will increase spending this year on R&D, sales and marketing, finance and accounting, customer service, risk management/compliance, talent, IT, and operations.

“Confident in their financial performance and ready to leverage diverse strategies to get ahead, CFOs aren’t passengers in determining the future of their organizations — they’re steering the ship,” BDO said in its survey report.

Only 11% of those surveyed said a potential economic downturn is the biggest threat their companies face this year.

Of course, middle market finance chiefs do face many troubling issues. Here are some prominent respective concerns for finance chiefs in the seven industries the survey addressed:

Energy. Most oil and gas CFOs say low oil prices are having at least some impact on their business, including stalling technology investments, hindering financing for new projects, preventing M&A, and decreasing profits. “Unless oil prices rise and remain at a higher level, these conditions are unlikely to abate,” BDO said.

Health care. Although health care CFOs’ financial projections for 2020 are positive overall, most forecast moderate increases of 1-9% in both revenue and profitability. “Market triggers like a potential recession and ongoing changes to reimbursement models are likely to put increased strains on providers,” according to the report.

Life sciences. The industry faces political and public pressure to increase generic competition and lower drug prices. Lawmakers have put forth numerous proposals to address the issue, including a House bill that would allow the government to negotiate a range of drug prices for Medicare Part D and private payers alike. Meanwhile, Amazon’s entry into the pharmacy business with direct-to-consumer distribution could shift the industry’s pricing paradigm.

Manufacturing. Middle market manufacturers need to realign their supply chain strategies to account for shifts in customer demand as well as demographics, BDO said. “When facing off against larger competitors who provide next-day or even same-day delivery, supply chain efficiency may need to take precedence over cutting costs.”

Restaurants: A key issue for restaurants is the struggle to fill jobs in the current low-unemployment economy. To entice and retain workers, they’ve had to raise hourly wages. If a recession does arrive, watch out. “Consumer discretionary spending — for restaurants that means dining out or ordering takeout — is one of the first luxuries to go during a recession, and reduced sales will bring margins, already narrowed by the high cost of labor, even further under pressure,” the report warned.

Retail: Retailers are wary of trade tensions early in 2020. At the start of the U.S.-China trade war, the impact of tariffs was related largely to manufacturers, but retailers have since learned that they are not immune. The new trade deal between the countries is encouraging, but even if all tariffs were lifted, retailers would “still be tasked with shedding the excess inventory that many stockpiled before tariffs set in,” BDO wrote.

Technology: In the tech industry, the calculus for risk vs. innovation is starting to shift. Why? “A spotlight is on the technology industry like never before,” the report noted. “Stakeholders don’t just expect new and exciting products and services; they want responsibility and governance. These demands are coming to a head at a time of turbulence in the economic and political climate.” 

Indeed, the tech industry’s top concern related to trade policy is not the impact on growth or pricing; it’s the potential impact on innovation. Tech CFOs have long faced challenges with intellectual property protection and friction with global competitors that seek to undercut U.S. players.