The lingering uncertainty in tandem with capital rationing is leaving many financial executives taking a ‘wait-and-see’ approach to long-term decision making. Moreover, senior-level financial executives again indicated greater confidence in their local economies than in that of the US economy as a whole.
Key findings:
A Hazy Horizon: 66% of respondents named forecasting as an accounting area in which their teams struggled the most.
A Cash Crunch: 43% of respondents indicated that working capital decreased in Q2. As future revenue levels are difficult to forecast, cash management will become increasingly important in the coming quarter.
Management Concerns
Unsurprisingly, the majority of respondents indicated that economic uncertainty is their management team’s top concern. Interestingly, the average ranking assigned to economic uncertainty rose from 2.22 in Q1 to 1.86 in Q2.
Weak demand for products and services was among the lowest prioritized management issues in Q1. Interestingly, faltering demand had the highest level of variance among the possible areas of management concern (attracting and retaining top talent, economic uncertainty, data security, cost of benefits, government policies, regulatory requirements, rising wages and salaries, and weak demand for products and services); this indicates that while weak demand wasn’t an area of significant concern for every management team, for those faced with this issue, it was one of paramount importance.
Holding Pattern
The survey results indicate that financial executives are more confident in their local economies and industries relative to last quarter as illustrated in the figure below. Further, financial executive confidence in the U.S. increased but remains relatively low relative to the other two categories.
Conversations with financial executives has indicated that stabilizing case numbers and gradual re-opening were a source of new-found optimism. Still, two-thirds of financial executives indicated that their finance teams were struggling to forecast a hazy future. Moreover, both near-term and longer-term projection assumptions are closely tied to COVID-19 infection rates and the development timeframe of a highly anticipated vaccination. One senior-level financial executive confided that the difficulty surrounding forecasting has his team planning for 2021 based on whether a vaccine is ready by the end of the fourth quarter:
- If a vaccine is ready by the end of the fourth quarter, his team forecasts that business activity return to what people were expecting for 2020.
- If a vaccine isn’t ready by the end of the year, the pall that has engulfed 2020 will depress the first quarter of 2021.
Still, these long-term assumptions do not address the difficulty in forecasting for the third and fourth quarter, due to the possibility of near-term surges and the associated need for strict quarantining. What’s more, recent discussion with members of FEI revealed that U-shaped and W-shaped curves were the most commonly assumed economic recovery patterns, which further illustrates the diversity of opinion surrounding business prospects.
The Effects of Uncertainty
In response to this lingering uncertainty, senior-level financial executives are indicating a preference for pausing, rather than cancelling or cutting, as demonstrated in the figure below.
The momentary holding pattern is depressing M&A activity as the majority of respondents (62.9%) indicate that their appetite is remaining relatively constant. However, two counteracting factors bely this consistency of appetite:
- a need to conserve capital; and
- a knowledge that the disruption has shifted equilibrium in favor of future deal making.
At the same time, 55.7% of respondents expect their total headcount to remain at similar levels through the coming quarter. The headcount freeze is again indicative of economic stability, yet the number of respondents planning to cut headcounts (24.5%) exceeds the number planning to expand them (19.7%).
In addition to the uncertainty, nearly half of all respondents indicated that their organization’s working capital balance decreased during the second quarter. One Chief Financial Officer remarked that his organization is focused on conserving cash and that cash-related financial metrics have become the KPIs his team scrutinizes the most. Moreover, it is important to remember that many organizations received CARES Act funding, which bolstered capital balances; if not for that critical funding, the proportion of respondents reporting decreasing working capital would likely have been higher. Until revenues become more predictable, capital-related uncertainty and corporate cash rationing is likely to continue.
In this quarter’s survey, we introduced a question related to corporate commitment to Environmental, Social, or Governance (ESG) issues.
In 2019, the impact of business on the environment came to the fore; while it remains as an important issue, social unrest has escalated the social component of ESG, and the public health crisis has increased the amount of attention on governance topics. Overall, corporate commitment to ESG issues remains relatively unchanged (as shown in the figure above); however, the North East, South, and West regions indicated significantly more commitment to ESG issues than in the Midwest as depicted in figure 2.
Section 3 People
While attracting and retaining top talent was less of a focus in Q2 compared to Q1, it is still something of which management teams are particularly mindful. Finance teams have been forced to determine how to best manage since early March, so it is not an area of concern for most finance leaders. Interestingly, survey respondents in the North East (significant number of respondents in the New Jersey and New York areas) and West (significant number of California respondents) regions indicated a greater proportion of their finance teams working remotely during the finance closes during the remaining fiscal year as seen in figure immediately below.
The mix of talent finance teams are looking to fill has experienced relatively little change as technical accounting, financial planning & analysis, and data management remained as the most sought-after skills.