Deloitte CFO Signals Q2 2015 Report

CFOs at some of Canada’s biggest companies have muted expectations for growth in the coming year, including for revenue, earnings and domestic hiring. Yet their overall net optimism is still higher than their U.S. counterparts. Learn more in the full CFO Signals report for 2Q15, from Deloitte.

By William A. Cunningham, Partner, Deloitte

When the Danish physicist and Nobel laureate Niels Bohr said that "Prediction is very difficult, especially if it's about the future," he could just as easily have been talking about economics as what the next big discovery was going to be in physics. Economic forecasting is indeed very difficult, but that hasn’t stopped economists from trying to predict what’s going to happen next. One way to do that is to look at leading economic indicators – such things as the number of building permits issued, manufacturers’ new orders for consumer goods and materials, and the S&P 500 stock index – to try to get a picture of where the economy is headed.

Perhaps it’s time to add another leading indicator to the mix: the Deloitte CFO Signals Survey.

The CFO Signals survey, which is conducted quarterly and tracks the thinking and actions of chief financial officers representing North American companies averaging more than $5 billion in annual revenue, has been a consistently good indicator of what to expect in the year ahead. After all, CFOs have a clear line of sight into the business operations and expectations of their companies, and they’re often the first to sense when things are changing – for good or for bad.

The latest CFO Signals took the pulse of chief financial officers of some of the biggest companies in Canada, the United States and Mexico over a two-week period in May. Its results, which were released on July 13, foreshadowed the recent news that Canada may have entered into a technical recession in the first half of 2015. For example, growth expectations among Canadian CFOs for revenue, earnings and domestic hiring all hit new survey lows in the second quarter of 2015, with all three categories recording negative growth expectations for the next 12-month period. Offshore hiring expectations, which often rise when domestic hiring plans decline, also dropped in Q2 2015. And capital expenditure expectations remained negative, as they were in the first quarter.

The survey also found that Canadian CFOs are much more likely than their counterparts in the United States and Mexico to focus on reducing their costs over growing their revenues. Nearly two-thirds (64%) of Canadian CFOs said they are most focused on cost reduction, compared with 29% in the United States and 21% in Mexico. With such a focus, it’s not surprising that Canadian CFOs also have the lowest expectations for wage growth within their companies in the year ahead at just 1.8%, well below the 2.8% expected in the United States and 4.3% in Mexico.
What may be a bit surprising, however, is that, even with such low expectations for the year ahead, Canadian CFOs recovered some of their overall net optimism (the difference between those expressing rising and falling optimism for their own company’s prospects), with that figure climbing to +29 in Q2 2015 from last quarter’s +15. This rising net optimism could be a sign that CFOs believe they have a workable plan to help their companies cope in Canada’s weakening economy.

Where CFOs are less convinced about their companies’ abilities to cope is in the area of crisis preparedness, with nearly a quarter of North American CFOs saying they are insufficiently prepared for cyber risks and malicious attacks (terrorism, tampering, etc.) on their businesses, despite the fact that there is a strong, broad-based concern about the risk of those types of crises occurring. That compares to CFOs overwhelming feeling that their companies are prepared to deal with potential legal and ethical violations, as well as such things as spills, recalls and the like.

The Q2 2015 survey also asked CFOs about the frequency of their substantive interactions with their company’s executives. Reflecting how CFOs have increasingly become an integral part of the overall management of companies, the survey found that almost all CFOs meet daily or weekly with their CEO and COO (where such a position exists). They also have frequent meetings with the heads of legal, HR, strategy and risk management, but less frequent interactions with their board chair. Yet even with their increased role in key decision-making within their companies, and perhaps in a sign of the need to navigate some potentially tricky economic seas ahead, CFOs reported that, compared to two years ago, they are spending less time in their “strategist” role and more in their “operator” role (Canadian CFOs reported roughly equal focus on both roles, as well as their “steward” and “catalyst” roles).

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