Five challenges for finance chiefs in 2023

Giv­en the grow­ing num­ber of por­tents, it’s hard to avoid the con­clu­sion that the com­ing year will be a notably tough one for busi­ness. 

Wise CFOs will already have been respond­ing accord­ing to their com­pa­ny and sec­tor needs. How­ev­er, the tenor of these respons­es is marked­ly more towards a defen­sive posi­tion, rather than expan­sion­ary. It’s all about cost reduc­tion. 

That’s small won­der. As Deloitte’s autumn 2022 Euro­pean CFO sur­vey sug­gests, CFOs are feel­ing “an all-time high” in their finan­cial and eco­nom­ic uncer­tain­ty, top­ping the pre­vi­ous all-time high of spring 2022. In the UK, 57% are pes­simistic about the finan­cial prospects for their com­pa­nies and sec­tors. Only a bold 13% say they’re opti­mistic for 2023. 

So far, so gloomy. “But there’s still scope to be opti­mistic,” says Knut Ron­ning, CFO of finan­cial soft­ware com­pa­ny Xledger. “The busi­ness envi­ron­ment that will shape the com­ing year can cre­ate good oppor­tu­ni­ties, too. It’s a great time for acqui­si­tions, for exam­ple. That’s not to say the sit­u­a­tion isn’t demand­ing. You still have to make your val­ue propo­si­tion very clear.”

1. Coping with complex systems

An unprece­dent­ed con­flu­ence of incon­clu­sive macro events – domes­tic eco­nom­ics and polit­i­cal uncer­tain­ty, Ukraine, Covid-relat­ed sup­ply chain dis­rup­tions, ener­gy inse­cu­ri­ty and cli­mate change – makes 2023 excep­tion­al­ly hard to read. 

“In the past, CFOs would be deal­ing with some of these forces, but not all of them at once, and that means we’re in unchart­ed ter­ri­to­ry,” argues George Gian­net­sos, CFO for train­ing com­pa­ny Peo­ple­Cert. “I think that means lim­it­ing attempts at under­stand­ing to one key ques­tion: how deep will the reces­sion be, and for how long?”

“The key task for CFOs, more than ever, will be to pre­pare for the unex­pect­ed. This inter­ac­tion of com­plex sys­tems gives rise to non-lin­ear results,” adds Michael Tay­lor, econ­o­mist at Cold­wa­ter Eco­nom­ics. “That gives the year ahead a volatil­i­ty that is incred­i­bly hard to analyse. The only rea­son­able response is to pre­pare a company’s finances accord­ing­ly.” Cut debt and keep cash flow tight, he rec­om­mends.

That’s per­haps all the more impor­tant giv­en the often-con­flict­ing sig­nals: sig­nif­i­cant inter­est rate ris­es and reces­sion, yet 4% growth for the UK, a tight labour mar­ket and strong mar­gins, until recent­ly. “We may see inter­est rates come down, sure, but then we may see huge infla­tion if Ukraine real­ly does blow up, or com­plete defla­tion if the econ­o­my goes into depres­sion,” Tay­lor adds. “The prob­lem is we have no idea.”

2. Protecting margins and balance sheets

“The biggest chal­lenge will be cop­ing with this envi­ron­ment of high costs, ris­ing inter­est rates (domes­ti­cal­ly and abroad) and con­tract­ing growth, with the Bank of Eng­land pre­dict­ing reces­sion last­ing until mid-2024,” argues Ian Stew­art, chief UK econ­o­mist at Deloitte. 

Deloitte iden­ti­fies cost reduc­tion and build­ing up cash reserves – “defen­sive bal­ance sheet strate­gies” – as the top CFO pri­or­i­ties, as was the case in 2009 and 2020. 

With cost increas­es baked into nego­ti­a­tions with sup­pli­ers – many of which will now look for more fre­quent reset­ting of their terms – many mar­kets will become much more price-sen­si­tive. CFOs will need to either lim­it cost increas­es by lock­ing in longer-term sup­pli­er agree­ments, for exam­ple, or cut­ting their unit costs. They could also revise prices upwards, trick­i­er still giv­en uncer­tain infla­tion­ary pres­sures. 

This is like­ly to require a laser-like focus on cash flow or the good for­tune to have high mar­gins. The tra­di­tion­al tac­tic of keep­ing prices low­er than the com­pe­ti­tion to win mar­ket share will not be an easy card to play. It’s also going to mean play­ing hard ball with less depend­able cus­tomers by lim­it­ing cred­it or lock­ing down more strin­gent terms of trade, while offer­ing dis­counts to ear­ly pay­ers. 

3. Acquiring and retaining talent

A Sep­tem­ber 2022 sur­vey from Gart­ner Finance sug­gests that find­ing tal­ent is the top chal­lenge fac­ing CFOs this com­ing year. Of course, eco­nom­ic pres­sures will see many CFOs cut back on hir­ing. How­ev­er, “cre­at­ing uncer­tain­ty [this way] can have quite the oppo­site to the intend­ed effect in fil­ter­ing through a company’s cul­ture, trust and brand in a way that can take years to re-estab­lish, if at all,” warns Jor­dan Relfe, CFO of prop­er­ty ser­vices com­pa­ny Life­proven. 

“You need more open­ness and hon­esty with your team to gar­ner the resilience that chal­leng­ing eco­nom­ic times require. That trans­lates into the qual­i­ty of work, and in turn gen­er­ates more work,” Relfe adds.

But even those who don’t cut back face a short­age of skilled labour because of Covid. Firms must still deal with trends like the great res­ig­na­tion, a less-mobile work­force and a short­age of the right skills. CFOs face dif­fi­cul­ty find­ing employ­ees with their cur­rent pref­er­ence for more tra­di­tion­al prob­lem-solv­ing and strate­gic busi­ness think­ing skills, rather than those adept at tech­nol­o­gy. 

Finance chiefs will need to reassess recruit­ment efforts to ensure that crit­i­cal roles are pri­ori­tised and to detect the tal­ent already avail­able in-house. All of this increas­es the com­pe­ti­tion for tal­ent and cre­ates an upwards pres­sure on wages, with infla­tion fur­ther com­pli­cat­ing the sit­u­a­tion in terms of sta­bil­is­ing and set­ting wage lev­els. 

But high­er wages alone won’t solve the prob­lem, espe­cial­ly in the broad­er con­text of low employ­ee morale. Employ­ers will need to look anew at their employ­ee val­ue propo­si­tion, with a view to mak­ing it more human-cen­tred and flex­i­ble. There will need to be greater oppor­tu­ni­ty for growth, with bud­gets allo­cat­ed accord­ing­ly. This is par­tic­u­lar­ly the case as diver­si­ty, equi­ty and inclu­sion becomes a com­pet­i­tive dif­fer­en­tia­tor between employ­ers.

4. Raising capital

Ris­ing inter­est rates and the impact on the cost of busi­ness bor­row­ing and on the will­ing­ness of lenders to offer appeal­ing terms can only encour­age CFOs to reassess the need for alter­na­tive sources of finance. Indeed, accord­ing to Deloitte’s sur­vey, CFOs now rate cred­it as more cost­ly than at any time since 2010. 

This is espe­cial­ly the case if bor­row­ings are due to mature over the next three years, dur­ing which a dou­bling or tripling of inter­est rates and a con­se­quent out­flow of com­pa­ny cash is not impos­si­ble. Tak­ing the long view and sound­ing out poten­tial investors soon­er rather than lat­er is wise, but so is devel­op­ing the cold­ly real­is­tic posi­tion of a readi­ness to give up full own­er­ship of the busi­ness. 

Keep­ing funds with­in the busi­ness by post­pon­ing planned div­i­dends, for exam­ple, may be a neces­si­ty; so could cost sav­ings through greater ener­gy effi­cien­cy and so on. But it’s also a sig­nal of the com­pa­ny’s longer-term sta­bil­i­ty. 

Delever­ag­ing is also an option in this cli­mate, says Tay­lor. “This might even be the time to try to diver­si­fy your port­fo­lio because the risks are so high in any par­tic­u­lar sec­tor,” he advis­es. “The return on cap­i­tal might not be great but at least you sur­vive.”

5. Finding focus

Lim­it­ed resources means those remain­ing must be utilised with bet­ter effi­cien­cy than ever. The ques­tion, sug­gests Ron­ning, is how to bring focus on your business’s key dri­vers “to allow a pause on those less crit­i­cal projects”. 

This requires improved analy­sis and action­able under­stand­ing of the business’s process­es. Invest­ment in soft­ware solu­tions is a start, but also recruit­ment that allows more day-to-day senior man­age­ment tasks to be offloaded to per­mit greater con­cen­tra­tion on what’s vital.

Ded­i­cat­ing resources to greater intel­li­gence at this time may feel coun­ter­in­tu­itive, giv­en the ten­den­cy to reduce com­mit­ment to large invest­ments. How­ev­er, as the 2008 reces­sion sug­gest­ed, invest­ment can ready a com­pa­ny for rapid growth once upbeat eco­nom­ic con­di­tions return.

Bet­ter per­for­mance man­age­ment infor­ma­tion – in part by strength­en­ing part­ner­ships between sales, prod­ucts and sup­ply chain man­agers – could prove essen­tial to grow­ing prof­its and under­pin­ning cus­tomer rela­tions. Improv­ing data through a bold­er approach to dig­i­tal tech­nolo­gies, automa­tion, machine learn­ing and IT process­es can also dri­ve smarter and often real-time deci­sions.