The trifecta of a solid U.S. economy, cheap capital, and the passage of tax reform is providing plenty of reason for CFO optimism.
But even with blue skies and forecasts calling for more sunshine, finance chiefs should be prepared for challenges that could get in the way of executing their organizations’ growth strategies and capitalizing on today’s buoyant conditions.
The following five core challenges could dampen CFOs’ optimism if they aren’t agile enough to address them.
Tax Law Unknowns
Businesses had been asking Washington lawmakers to address tax reform for a long time. It’s finally here. Now, CFOs must grapple with tax law changes that have the potential to reshape operations and upend years of planning. Moreover, they have to assess those multiple impacts while still awaiting guidance on a number of provisions.
Companies may find it particularly challenging to assess issues such as these:
- How cash taxes are calculated and how they are accounted for pursuant to generally accepted accounting principles
- How provisions of the Tax Cuts and Jobs Act might affect international operations
- Implications of IRC Section 162(m), the IRS provision that limits the tax deductibility of compensation in excess of $1 million paid to “covered employees,” which now includes CFOs
Moreover, it may take years to answer questions regarding how an organization’s tax structure might need to evolve under the new law. However, CFOs should consider taking steps now to understand (1) what it would take to restructure, and (2) how a tax restructuring could impact shareholder value and financial performance. The tax function will likely have a major role in that effort.
Deploying Excess Cash
In the wake of tax reform, many business leaders are being closely watched for how they choose to spend the excess cash expected from repatriation and lower tax bills. Lack of a clear, defensible strategy for excess cash can risk criticism from major shareholders, boards, employees, policymakers, Wall Street, and activist investors.
As leaders of the capital allocation process, CFOs (working with their CEOs) should evaluate their capital strategies in light of tax reform. With no shortage of ways to deploy excess cash — including acquisitions, stock buybacks, dividends, employee compensation, debt restructuring, and investments in R&D — it is crucial to have an effective capital allocation framework that covers several years.
Such a framework can be very important for maintaining discipline in capex decisions. It will also help ensure that those decisions align with an organization’s strategic priorities, deliver the expected outcomes, and drive shareholder value.
If constructed properly, the framework can also be instrumental in conveying management’s plans for its excess cash to the Street.
The excess cash from tax reform is adding rocket fuel to expectations for deal-making. But the combination of record-high valuations and cash-rich buyers eager for assets that could propel their growth strategies — particularly around digital technologies — means CFOs have to walk a tightrope.
On the one hand, they should act swiftly to acquire strategically valuable companies before the competition does. On the other hand, they may risk overpaying for “shiny new toys” that don’t truly support their growth strategy and thus don’t deliver their promised value.
The heated M&A climate elevates the importance of maintaining a disciplined approach in all phases of an acquisition, from target identification and synergy identification to integration execution. Finance chiefs should work closely with corporate development to understand and assess deals under consideration. Pending deals need to align with strategy, and business cases must be based on hard numbers and realistic projections.
The Talent Squeeze
Talent has topped CFOs’ list of concerns for a long time, based on consistent findings from Deloitte’s quarterly CFO Signals™ surveys. The first quarter of 2018 was no exception.
The focus on talent acquisition, quality, and retention has intensified, with CFOs reporting rising concerns about executing their growth plans. Both within finance and outside it, the skills needed to innovate, apply digital and cognitive technologies, and keep pace with customer expectations are in high demand. They’re also expensive to acquire.
What is now a “nice-to-have” skillset could soon become a minimum requirement. As the nature of finance work evolves, different kinds of finance professionals will likely be needed, including data scientists and business analysts who can use evolving technologies and, in some cases, excel as storytellers.
To stay ahead, CFOs are seeking individuals who can fill those roles and others who can develop into the next generation of leaders that will reshape how finance work gets done.
With so much competition for top talent, the willingness to pay top dollar for valuable talent won’t be enough. CFOs should consider using their organization’s talent challenges to make the case for investing in employee development and retention efforts. Those can help fill talent gaps and add capabilities, especially as organizations explore digital finance.
External Developments and Risks
Recent market volatility, the passage of tax reform just before year-end, the imposition of steel tariffs, and threats of retaliation by trading partners: These are all reminders of how quickly external events can emerge to disrupt even the most carefully crafted and well-executed business plans.
As stewards and strategists, CFOs should understand and catalyze activities to plan for the potential impacts of external risks such as rising interest rates, possible trade wars, and other developments.
By applying finance’s analytic and forecasting capabilities, along with scenario planning and risk sensing, CFOs have a greater chance to mitigate the external risks that could cloud the longer-term outlook for their businesses and shareholder value.
Sandy Cockrell III is national managing partner of the U.S. CFO Program, Deloitte LLP, and the global leader of the CFO Program for Deloitte Touche Tohmatsu Limited.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
Copyright © 2018 Deloitte Development LLC. All rights reserved.