Cross Off 2003, Say CFOs

CFOs, CEOs, and the OECD don't see a recovery until 2004; finance chiefs say they'll keep on cutting.
Stephen TaubNovember 22, 2002

For those hoping the economy will turn around in 2003, here’s some bad news. CFOs think next year will be just about as bad as the current model.

Indeed, more than two-thirds of middle-market chief financial officers believe that in 2003, the economy either will stay flat, act erratically, or decline further. This according to an American Express survey of 485 middle-market CFOs.

As a result, the finance executives see managing indirect costs as one of the biggest challenges to improving their overall financial health in the coming year, reports Amex.

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“With cautious to negative economic expectations, most senior financial managers polled in our survey will rely on containing costs as much as growing revenue to maintain the financial health of their organizations during the next year,” said Anre Williams, senior vice president and general manager (U.S. middle market) of American Express Corporate Services.

“This is a marked departure from the late 1990s when companies placed phenomenal growth and increased revenues over cost containment,” noted Williams. “In today’s environment, in order to put their houses back in financial order, executives have refocused their attention on expense management.”

American Express surveyed 485 senior financial managers at midsize organizations with average revenues of $181 million.

The results jibe with what CEOs apparently see coming down the pike.

In a recent survey by the Business Roundtable, a majority of CEOs said they expect weak gross domestic product (GDP) growth, declining employment, and flat capital spending in 2003. “Our companies are in the business of creating jobs and contributing to economic growth, but we have grave concerns about our ability to do these things in this fragile economic environment,” noted John T. Dillon, chairman of the Business Roundtable and CEO of International Paper.

Further proof of the lousy economy: the Organization for Economic Cooperation and Development (OECD) reported in its November Economic Outlook that the U.S. economy would not pick up until 2004. The OECD is predicting a 2.6 percent GDP growth next year (up slightly from 2.3 percent in 2002), with a 3.6 percent gain in 2004.

For their part, many CFOs say they’re having trouble just sizing up next quarter. More than half of the respondents in the Amex survey said they have encountered obstacles to forecasting operating budgets accurately. Nearly a quarter admitted that they have steady problems or a critical issue with their ability to forecast operating budgets, according to the survey.

As a result, the majority of polled CFOs intend to focus on streamlining internal processes, negotiating better deals with suppliers, and improving the management of capital to contain direct and indirect costs.

In addition to controlling their own internal costs, respondents said they are looking for ways to wring costs from their vendors. As proof, 85 percent of the survey’s participants said they are not getting the best possible rates from their vendors of indirect goods and services.

Why’s that? Because of a perceived lack of buying power, adequate negotiating staff, or aggregated spending data, respondents said. (To see how some companies are applying purchasing strategies to travel and entertainment spend, read’s upcoming special report on T&E cost management, airing December 1.)

Even so, few organizations have actually established and enforced spending policies within their companies. One reason: 42 percent said the lack of tools to monitor employee compliance with spending policies has caused problems managing expenses, either occasionally or regularly.

Still, three out of four of the survey respondents said a major priority is to contain or reduce indirect expenses such as office supplies, express shipping, telecommunications, travel and entertainment, computer equipment, and other nonproduction services and goods, which the CFOs rate as being equally important as finding new sources of revenue. (To see which companies are the best at controlling internal costs, use our interactive benchmarking tool, CFO PeerMetrix.)

Interestingly, some 44 percent of the respondents said they will place tighter restrictions on indirect expenses other than T&E, while 29 percent said they will further restrict T&E spending.

Other findings from the BRT survey:

  • 60 percent of CEOs expect their employment to drop in 2003, 28 percent expect it to remain the same, and 11 percent expect employment growth.
  • 57 percent of CEOs expect their U.S. capital expenditures in 2003 to be the same as 2002 levels, while 24 percent expect a decline. Only 19 percent expect higher capital spending.
  • 64 percent expect GDP growth rates of less than 2 percent in their 2003 planning, while 36 percent expect GDP growth of more than 2 percent.
  • 19 percent expect their 2003 sales to be flat compared with 2002, while 9 percent expect sales to be lower. 71 percent of the CEOs expect higher sales in 2003.