CFOs Focus on the Battle Against Inflation

While increasing goods and services costs abound, CFOs are optimistic about the future, according to a new survey from Grant Thornton LLP, the sixth-largest accounting and advisory organization in the United States. The survey reveals a continual decline in optimism as CFOs take steps to combat inflation.

Since September 2021, the percentage of respondents who are optimistic about the U.S. economy has fallen 20 percentage points to just 49%. Increasing costs of goods and services easily topped the list of reasons for a negative outlook - 80% of CFOs cited this as their main reason.

Meanwhile, supply chain challenges, the war in Ukraine and inflation also figured prominently in finance leaders’ pessimism. In response to inflation, 60% of respondents said they are increasing their budget for compensation.

On the positive side, 50% of more than 270 CFOs surveyed said they believe the economic impact of COVID-19 is waning. Whereas one-third (33%) of the respondents in a previous survey (released in February 2022) said they expected inflation to impact their business for more than a year, that number fell to 25% in the more recent survey.

“Given the aggressive rate hike schedule the Fed is now proposing, many CFOs are hopeful that inflation will begin to moderate,” said Enzo Santilli, national managing partner of transformation at Grant Thornton. “Still, finance leaders are preparing to grapple with a host of complex challenges throughout the rest of 2022.”

Price hikes gain popularity
The 2022 Q1 CFO Survey also showed the lengths finance leaders will go to mitigate inflation.

For instance, 50% of CFOs surveyed said they plan to raise prices. Of those planning to raise prices, 82% expect to increase their prices by 5% or more and over one-fourth (28%) expect to raise prices by more than 10%. This is likely a direct response to inflation concerns: Nearly half (46%) of CFOs expect inflation to have a negative impact on their profits in calendar year 2022. At the same time, over one-third (35%) expect inflation to have a positive impact on their profits this year.

While price hikes and an increased investment in compensation were the two most popular inflation mitigation strategies, survey respondents detailed a variety of approaches. For instance, 38% of CFOs surveyed are changing their debt structure.

“Inflation is not a monolith,” said Sean Denham, Grant Thornton’s national audit growth leader and the managing partner of the firm’s Philadelphia office. “It really depends on your cost drivers. Services companies are dealing with spiraling wages, and companies that are big energy consumers must address rapid increases in energy costs. But not every market or consumer will react the same way to price increases. It makes sense that companies will tailor pricing decisions based on their costs and their markets.”

Meanwhile, rate hikes from the Federal Reserve drew plenty of attention. Respondents were hopeful hikes will help control inflation in the long run, but over three-fourths (76%) of CFOs expressed concern that those same hikes could lead to a recession.

Supply chain and cybersecurity rank as top concerns
Amidst inflation, production center lockdowns in China and the war in Ukraine, supply chain disruptions are likely to continue for the foreseeable future. That explains why more than one-third (35%) of survey respondents cited supply chain troubles as a key challenge. But these ongoing disruptions didn’t rank as the top challenge facing businesses. Rather, 40% of CFOs cited cybersecurity as their greatest concern.

According to John Pearce, a principal in Grant Thornton’s Cyber Risk Advisory practice, the pervasiveness of ransomware attacks is likely troubling many companies. Yet CFOs are mostly in existing cybersecurity efforts - not new initiatives.

“We’re seeing companies mostly increase investment in existing responses like multifactor authentication, Endpoint Detection and Response (EDR) capabilities, and enhanced incident response capabilities,” said Pearce.

Work location preferences diverge for CFOs and employees

The CFO survey also found many leaders grappling with the phenomenon known as the “Great Resignation.” Fifty-seven percent of CFOs said talent attraction and retention is their primary human capital challenge, while 48% of CFOs are expecting their compensation and benefits investment to increase. Nearly half (45%) plan to spend more on recruiting.

When asked about their return-to-office plans, CFOs painted a multifaceted picture: While 74% believe hybrid and remote work are here to stay and are committed to improving that model, 61% of respondents also said they are focused on getting most or all their people returning to work on-site. The latter statistic runs contrary to what most employees want: In Grant Thornton’s most recent “State of Work in America” survey, 80% of respondents said they want flexibility in where and even when they work.

Changes to ESG, DE&I Investment
Lastly, the survey revealed a slow-down in investment plans for environmental, social and governance (ESG) initiatives, as well as diversity, equity and inclusion (DE&I). Just 34% of CFOs surveyed expect to increase their investments in DE&I, and only 31% plan to increase investments in ESG.

“It may be tempting for CFOs to let focus on DE&I and ESG slip when conditions begin to tighten,” said Marjorie Whittaker, a managing director of ESG & Sustainability at Grant Thornton. “However, the new SEC regulations won’t be the last we see in this area, and public, employee, and investor focus isn’t going away. Organizations will need to maintain, and probably even increase, these efforts.”

In past CFO surveys, the landscape was dominated by uncertainty. While plenty of ambiguity remains, CFOs now have a much clearer vision of the road ahead. Yet that road looks bumpy. “CFOs are trying to position their companies for success while coping with multiple crises that have short- and long-term implications,” concluded Santilli. “The ‘fasten seat belt’ sign is on, and finance leaders must be ready for a rough ride ahead.”

CFO Survey Touchpoints

49% have a positive economic outlook for the next six months - down from 57% last quarter

60% plan to increase their budget for compensation to manage inflation

74% say hybrid model is here to stay, while 61% want people back in office

80% cite the increased costs of goods and services as their reason for a negative outlook

50% expect to raise prices to mitigate inflation