CFOs optimistic about their company's future

Chief financial officers of North America’s largest companies are significantly optimistic about their firm’s prospects and expect higher earnings, sales and hiring for the year ahead, according to Deloitte's third quarter CFO Signals™ survey released Monday.

However, CFOs remain wary of external risks, as concerns over equity market valuations, the European economy, political interference, economic and financial risks and government tax policy were expressed.

The survey, which tracks the thinking and actions of more than 100 CFOs from very large North American companies, recorded a decrease in CFOs expressing declining optimism relative to the prior quarter. For the third quarter, 43.7 percent of CFOs expressed improving optimism, relatively unchanged from last quarter. However, only 11.7 percent expressed declining optimism – the lowest proportion since the survey began in 2010. Overall, net optimism increased quarter-on-quarter from +25.7 to +32.0.   

The improved level of optimism was reflected in increases to CFOs' expectations for key performance metrics. Year-over-year expectations for sales growth rose to 6.8* percent, the highest level recorded for three years and the third consecutive quarterly increase from a survey low of 4.1* percent at the end of 2013.

Earnings expectations also increased from 8.9* percent last quarter to 10.9* percent, the highest level recorded since the first quarter of 2013. In total, 90 percent of CFOs expect year-over-year gains in earnings, the highest proportion in the survey's history. Hiring expectations hit a five quarter high of 2.3* percent, a rise from 1.6* percent in the second quarter, though hiring forecasts by U.S. CFOs were not as positive as their Canadian and Mexican counterparts, rising only from 1.4* percent to 1.7* percent.

Despite these figures, there are a number of concerns still prominent in CFOs' minds. Sentiment regarding performance of the European and North American economies one year from now fell for the second consecutive quarter. Overall though, CFOs continue to believe the North American economy will be better, not worse, one year from now.  

The majority of CFOs, 63 percent, also continue to believe that U.S. equity markets are overvalued while 47 percent believe external financial and economic risks are higher than normal. Only 14 percent believe such risks are lower. Concern over government tax policy and reform also increased. This reflects a wider concern with 65 percent of CFOs expecting moderate or high disruption to their business from government regulation. 

"There is a clear shift to a more positive outlook this quarter as well as a level of optimism not seen in recent years," said Sanford Cockrell III, national managing partner, Deloitte LLP and leader of the Deloitte CFO Program. "While familiar risks remain on the radar, sentiment has ticked up from previous quarters."

Despite CFOs' improved outlook and confidence on growth prospects, one key metric that did not increase this quarter was the forecast for capital spending growth. Year-over-year expectations declined to 5.0* percent, a decrease from 6.8* percent in the second quarter and the lowest level since the third quarter of 2013.

In the United States, CFOs forecast even lower capital spending growth of 3.5* percent, an all-time survey low. The figures continue a long-term decline in capital spending forecasts since the survey began in 2010. Forecasts were typically close to 12 percent in the first quarter of each year between 2010 and 2012 but have declined markedly since then.

"We may be seeing signs of a new, lower normal for capital spending levels," noted Greg Dickinson, director, Deloitte LLP, who leads the North American CFO Signals survey. "Some organizations may have developed excess capacity during the recovery, while others may now be less reliant on hard assets for growth – and more reliant on digital technologies that scale relatively inexpensively. And we may be seeing some companies exchanging company-owned assets for outsourced services."

Additional findings from the Deloitte Q3 CFO Signals survey include:

• Cyber security concerns remain: Almost three-quarters of CFOs say cyber security is a high priority for their company, but only 62 percent say they have a comprehensive information strategy in place, and less than 20 percent express high confidence in their ability to execute on their plans.

• CFOs report strong relationships with other leaders: Overall, CFOs report very good relationships across their peer group, particularly with their CEO, audit committee chair, and general counsel. Board chair is the only role with whom less than 50 percent of CFOs report very good relationships. CFOs say their top peer-level allies are other executives with broad, general responsibilities – especially chief operating officers, general counsel, and CEOs.

• CFOs confident in their finance departments' staff: CFOs generally express confidence in the capabilities of their staff, but controllers rank highest. Confidence appears lowest in the effectiveness of CIOs and internal audit leaders, but CFOs still overwhelmingly rate their confidence in these staff as at least "good." Controllers and FP&A leaders are CFOs' most common allies within Finance – and by a substantial margin.

To download a copy of the survey, please visit: http://www.deloitte.com/us/cfosignals2014Q3.  

*All numbers with an asterisk are averages that have been adjusted to eliminate the effects of stark outliers.

The Deloitte CFO Signals™ survey for the third quarter of 2014 was conducted between Aug. 8, 2014 and Aug. 22, 2014. Eighty-three percent of the 103 CFO respondents were from organizations with more than $1 billion in annual revenues, and 75 percent were from publicly-traded organizations.

Each quarter, CFO Signals tracks the thinking and actions of CFOs representing many of North America's largest and most influential organizations. This report summarizes CFOs' opinions in four areas: business environment, company priorities and expectations, finance priorities, and CFOs' personal priorities.