CFOs Opt for Defensive Strategies as Tech Investment Rises

CFOs of the UK’s largest firms are optimistic about prospects for their own businesses as they enter 2024.

Deloitte’s latest CFO survey revealed that sentiment among finance leaders has risen for the second consecutive quarter – to well above average levels – with a net 11% of CFOs more optimistic about the financial prospects of their business than they were three months ago.

The research was conducted between 28 November and 12 December 2023, a total of 72 CFOs participated in this quarter’s CFO Survey, including the CFOs of 12 FTSE 100 and 26 FTSE 250 companies. The combined market value of the 35 UK-listed companies surveyed is £328bn, or approximately 13% of the UK quoted equity market.

The data revealed that there is a strong consensus among finance leaders that the UK has entered a prolonged period of high labour costs. A net 92% of CFOs expect labour costs to remain elevated in the long term, relative to 2023. But CFOs are decidedly bullish on investment in new technology, with a net 63% of CFOs expecting investment in new technology to increase in the long term.Finance chiefs also anticipate a greater role for the state in the economy, with significant proportions expecting an increase in levels of taxation (net 39%) and regulation (net 42%).By contrast, CFOs think that levels of flexible or home working have peaked, with a net 57% expecting home working to decline in the long term.
 
CFOs’ balance sheet strategies remain largely defensive. Cost reduction is their top priority, with 51% of CFOs rated reducing costs as a strong priority for their business over the next 12 months. Increasing cashflow follows, with 47% of CFOs rating it as a strong priority. A sharp fall in the priority assigned to introducing new products and services or entering new markets (only 15% of CFOs say it’s a strong priority now) has driven expansionary strategies further out of favour.

Khalid Talukder, co-founder, DKK Partners said: “As we enter 2024, it’s clear that higher interest rates and geopolitical instability will continue to act as a stumbling block for CFOs. However, with finance leaders remaining cautiously optimistic and inflation falling, it’s vital that ambitious businesses don’t dial-down on important growth strategies such as plans to expand internationally. Far too many fast-growing companies still lack the payments infrastructure they need to seamlessly conduct transactions in crucial emerging markets, and this must be resolved if businesses wish to achieve their full potential.”

 Josh Boer, director at tech consultancy VeUP commented: “Against a backdrop of high interest rates, many CFOs will be looking for new ways to boost productivity and drive savings this year. With this in mind, embracing transformational technologies like cloud and AI should be a top priority for CFOs looking to enable their organisation to achieve its full potential. Many finance leaders have this ambition, but they often lack the technical and operational support to deliver it. Moving forward, it’s critical that fast-growing companies work with specialist technology partners to drive digital transformation for the long term.”

Ian Stewart, chief economist, said: “These findings may seem at odds with recent economic news, particularly a contraction in third quarter GDP and forecasts of sluggish UK growth in 2024. But, while the pace of growth softened in 2023, activity proved more resilient than expected, with unemployment at low levels, corporate profitability holding up and an absence of stress in financial markets. Crucially, inflation has fallen sharply since the summer, bolstering expectations of earlier interest rate reductions.”

Finance leaders expect price and wage pressures to soften over the next two years. They see the Bank of England’s base rate falling from its current level of 5.25% to 4.75% in a year’s time.

CFOs again see geopolitical factors as the greatest external risk to their own businesses over the next 12 months, with a weighted average rating of 63, up from 59 in the previous survey. Reflecting on the risk that this poses to their businesses, a net 44% of CFOs expect greater diversification and near-shoring of supply chains in the longer term.There is also increased anxiety about productivity and competitiveness in the UK economy, which is now second on the risk list with a rating of 56, up from 53 last quarter.