While CFOs and their finance teams are working within initiatives to cut costs, many are trying to balance opportunities for improving performance with preserving future growth. CFOs and their teams have hoped to be able to control what they can, build for growth, and retain their best talent, all while trimming budgets and reducing risk wherever possible.
As the year’s halfway point has come and gone without a significant economic downturn, many CFOs, especially those more cautious to begin the year, plan to loosen the purse strings to leverage the still-positive economic climate.
Despite a recession being a real possibility, CFOs are ready to spend to achieve growth. So much so that new research from McKinsey’s latest report on CFOs’ responses to economic volatility found that nearly six in 10 (57%) of 215 CFOs across the globe plan to increase their internal investments over the next 12 months.
Growth Expectations and Risks
Despite economic uncertainty, most CFOs, although slightly fewer than a year ago, are still confident their industry will grow over the next 12 months. Over half (55%) of the CFOs surveyed in Q2 2023 expected a better industry growth rate over the next year. For those who don’t expect growth to increase, 23% said their growth rate would be worse, and 22% said they expected it to stay the same.
A major factor in CFO confidence surrounding growth is the risk of continued inflation. Over half (58%) of finance leaders cited inflation as the biggest risk to their companies’ growth, up from just a third (33%) who cited it in Q3 of 2022. Economic volatility, a risk cited by less than a fifth (18%) of CFOs last year, was chosen by over half of CFOs (51%) as a substantial risk to growth the rest of this year and next.
Operational Practices for Managing Volatility
To counter uncertainty around the larger economy and its impact on their businesses, nearly three-quarters (72%) of CFOs have increased their participation in business decision-making. But they are also performing activities within finance to get a better estimate future financial performance and share that information with interested parties.
Nearly two-thirds (64%) are turning to a more frequent analysis of cash flows and more frequent short-term budgeting, or both, as standard operational practice. Nearly half (45%) are monitoring economic trends with more reqularity.
Few CFOs, though, have seriously changed operations or workflows to address the issue of economic volatility. Less than a fifth (18%) have increased the frequency of volatility meetings, and only 13% have dedicated an individual role to managing the risks associated with volatility, McKinsey found.
Strategies for Managing Volatility
On the strategic side, finance leaders were asked to rank the most impactful actions to manage macroeconomic volatility. The top two strategies selected were passing rising costs onto customers (to preserve margin), chosen by 63% of CFOs surveyed, and reducing exposure to fixed costs, chosen by 52%. About two-fifths of CFOs said liberating working capital was the most helpful, and the same percentage chose reallocating investments across the company’s portfolio.
Elements of environmental, social, and corporate governance (ESG), where nearly all finance leaders feel pressure to participate and be involved, are not seen by many CFOs as a hedge against future uncertainties for their own companies. Despite the environmental aspects of ESG being highly coveted in conversations around the future of regulations in corporate finance, less than a tenth (7%) of CFOs viewed their organization’s energy consumption mix as a metric for company exposure to future volatility.