Chief Financial Officers in the United States lead CFOs in Europe in optimism, access to credit, and plans for hiring new workers, according to a recent survey. Despite their differences, U.S. and European CFOs share some of the same business challenges and economic worries as they kick off 2011.
Executives on both sides of the globe are seeing opportunities for their local economies and businesses in 2011 following a difficult few years, with similar plans for capital expenditure, according to the survey conducted by Financial Executives International (FEI) and Baruch College's Zicklin School of Business.
The quarterly CFO Outlook Survey polls CFOs of public and private businesses of various sizes on their economic and business confidence, and timely issues impacting their companies. For the first time in the survey's history, CFOs in Italy and France also were polled this quarter for a comparison of trends between the U.S. and Europe.
U.S. CFOs are continuing to show increased confidence, reflecting one of the largest increases in the survey's history, according to the survey. The Q4 CFO Optimism Index for the U.S. economy rose more than ten points (from 55.2 to 65.5) and the outlook for CFOs' own companies' also increased nearly four points (69.1 in Q3 to 73 this quarter). U.S. CFOs demonstrated a higher level of confidence in their companies' prospects for financial success than their European counterparts by more than seven points (65.6). In comparing their optimism about the current global economy, U.S. CFOs were undoubtedly more confident (64.3) than CFOs in Europe (58.2).
U.S. CFOs also are more certain in their plans for hiring than those in Europe. This quarter, the majority (64 percent) of U.S. CFOs plan to hire additional employees within the next six months, an increase from October when 56 percent of U.S. respondents stated the same. European respondents were largely split when it came to hiring strategies – less than half (46 percent) plan to hire, and a similar percentage (43percent) stated they do not plan to hire.
"The CFO Outlook Survey has always shed light upon the plans and concerns facing U.S. CFOs, and adding France and Italy to our poll will provide us with global insight on the pulse of businesses", said John Elliott, Dean of the Zicklin School of Business at Baruch College. "CFOs of all of the countries surveyed are seeing improvements in the economic landscape from 2009, when they were hardest hit, although U.S. CFOs are trending higher than those in Europe."
In both the U.S. and Europe, slightly more than half of CFOs anticipate no change in their access to credit over the next six months (53 percent in Europe and 55 percent in the U.S.). However, the findings among the remaining CFOs in each region reflect an easing of credit conditions in the U.S. over Europe. More than a third (36 percent) of U.S. respondents anticipate easier access to credit, double the percentage of European respondents (18 percent), while almost three times the percentage of CFOs in Europe (29 percent) expect credit access to be more difficult than those CFOs in the U.S. (10 percent).
CFOs in both Europe and the U.S. expect continued significant growth in both revenue and net earnings in the next 12 months. Because they are expecting modest growth in their product prices (2 to 3 percent) the majority of the growth is in unit volumes and new products. However, the patterns are different in important ways. In the U.S., revenue is expected to grow at 10.5 percent while earnings growth is expected to be higher (16.6 percent), suggesting continued strong gains in efficiency and cost controls over and above volume growth. In Europe, expected revenue growth (13.1 percent) is higher than net earnings growth (9.5 percent), suggesting that CFOs have less available capacity and face more pricing pressure on inputs.
Similar business challenges
In terms of the impact of the global financial downturn and subsequent ramifications, 2009 was undoubtedly the most difficult year for CFOs in recent history. Fifty-five percent of U.S. CFOs and 43 percent of European CFOs were hardest hit in 2009.
However, moving into January 2011, CFOs in the United States and Europe alike felt that revenue growth would prove to be the biggest challenge for their businesses in the first half of 2011. CFOs in the U.S. (39 percent) and Europe (33 percent) also were matched in their top worries for 2011. When asked to pick their top two worries for the year, domestic economic growth and consumer spending topped the list on both sides of the pond.
- Nearly a quarter of U.S. CFOs selected domestic economic growth (23 percent; another 18 percent selected this as their No. 2 worry); 22 percent chose consumer spending as top on their list (another 13 percent selected this as their No. 2 worry). Other top concerns include government regulation and health care costs.
- Similarly, more than quarter of European CFOs put consumer spending at the top of their list (28 percent; another 12 percent stated this was their No. 2 worry), while 25 percent chose domestic economic growth as their No. 1 concern (23 percent cited this as their No. 2 worry). Government regulation and global competition followed as key concerns.
CFOs across the board are demonstrating prudence as it relates to their capital expenditure. Nearly half of CFOs describe their current activity as spending cautiously (47 percent in the U.S.; 52 percent in Europe). However, a quarter of European CFOs and 30 percent of U.S. CFOs are spending at a normal rate. This is progress from six months ago, when only 19 percent of U.S. CFOs were spending normally.
Technology is a central focus for capital expenditure, with 69 percent of U.S. CFOs and 56 percent of European CFOs directing their investments toward this area. Over the next 12 months, U.S. CFOs expect an 11 percent increase and European CFOs expect a six percent increase in technology spending. Other areas of capital expenditure focus include expansion into new and emerging markets (21 percent of U.S. CFOs and 34 percent of European CFOs) and machinery (36 percent of U.S. CFOs and 33 percent of European CFOs).
"The impact of the financial downturn was far reaching, and our findings demonstrate universally compelling concerns and business issues", said Marie Hollein, president and CEO of FEI. "Many local economies have been hit hard in the past few years. CFOs globally understand that consumer spending is critical to restoring their economies to pre-recessionary levels and maintaining their revenues. The findings also reiterate the need for CFOs across the globe to have an open dialogue about these issues, something that FEI continues to strongly advocate and facilitate."
U.S. CFOs negative on health care, positive on tax reform
While U.S. CFOs this quarter demonstrated optimism in overall economic conditions, their outlook on regulations closer to home were dismal. CFOs in the U.S. were asked about the impact of the health care reform passed in 2010, on both Americans and their own companies.
- Fifty-nine percent of U.S. CFOs surveyed felt that the law has impacted the country negatively, with only 17 percent believing the impact of the reform has been positive; close to a quarter (24 percent) felt there was no impact.
- U.S. CFOs had an even stronger opinion when it came to the effects of the bill on their own companies. Only 4 percent felt it was showing a positive impact for their business, while the large majority (64 percent) felt the impact was negative. Nearly a third (32 percent) of those respondents observed no impact toward their businesses since it was passed last year.
As most CFOs interpret the health care act to be negative for their companies, many are taking actions to offset the added costs to their businesses. While the average increase in costs related to the health care bill was only 5 percent, nearly half of U.S. CFOs (49 percent) said that they had to increase the employee co-payment, about one-fifth (21 percent) reported a reduction of benefits for employees, and 17 percent have decreased the quality of their health care packages. A third of CFOs have taken no actions to offset expenses.
Potential tax reform also is on the minds of U.S. CFOs at the start of 2011, who appear encouraged about the outcome of a new tax package. Sixty-eight percent of those surveyed in the U.S. felt the effect would be positive for the U.S. economy, with far less believing that it will have a negative effect (14 percent) or no impact at all (18 percent).
Additional global findings from the survey include the following:
- Targets for Expansion: Nearly three-quarters of U.S. CFOs (72 percent) are targeting North America for expanding operations, followed by Asia (25 percent) and Latin America (22 percent). European CFOs also prefer to keep expansion close to home: 40 percent are targeting Western Europe, 33 percent are looking at Central Europe, and 31 percent are looking at expansion opportunities in Asia. Specific expansion to China, a region of interest for many companies globally, was not an immediate target for CFOs participating in the survey: a little more than a quarter (28 percent) of European CFOs and far fewer U.S. CFOs (16 percent) are planning an expansion of their operations to China in the next 12 months.
- M&A Activity: When comparing M&A plans relative to the previous quarter, over one-third (36 percent) of U.S. respondents to the Q4 survey said their company's interest in making acquisitions has increased. Only 5 percent of CFOs said their interest in M&A had decreased, while most respondents (60 percent) see no change in their interest. European CFOs echoed a similar sentiment for their M&A targets: though most felt their interest has stayed the same (65 percent), nearly one-third (30 percent) felt their interest in making acquisitions had increased.
Full survey results (including due dates for outstanding long-term debt, outsourcing, and employee benefit plans for U.S. CFOs) and historical data comparisons are available at www.financialexecutives.org or from Nicole Madison at Nicole.Madison@fd.com. The study also is available online at the Financial Executives Research Foundation bookstore and on the Baruch College home page at www.baruch.cuny.edu.
This quarter, the CFO Outlook Survey, conducted by Financial Executives International and Baruch College's Zicklin School of Business, interviewed 336 corporate CFOs from the United States, 160 corporate CFOs from Italy and 50 corporate CFOs from France electronically from January 10-18. CFOs from both public and private companies and from a broad range of industries, revenues and geographic areas, including some off-shore companies, are represented. The U.S. survey respondents are members of Financial Executives International; France survey respondents are members of Association Nationale Des Directeurs Financiers Et Du Controle De Gestion (DFCG) and Italy survey respondents are members of Associazione Nazionale Direttori Amministrativi E Finanziari (ANDAF).