Facing “a once-in-a-generation shock” from the pandemic, 56% of CFOs see a need to completely overhaul their capital allocation strategy, with about two out of three saying they were unable to fund all planned projects in 2020, EY found in a survey of 1,050 financial executives in nine countries.
Only 47% of CFOs say their capital allocation process meets total shareholder return goals and more than two-thirds plan to rebalance their portfolios to focus on core business.
“Changes in customer demand and behavior, uncertainty over the pace of the post-pandemic recovery, difficulty in developing forecasts and the need to decide which changes spurred by the pandemic are permanent and which are temporary all point to the importance of continuous improvement in the capital allocation process,” EY said.
The coronavirus has “supercharged” digital transformation, EY said, adding that 62% of CFOs “say accelerated digital transformation will impact capital allocation going forward.” Fifty-two percent of CFOs said lack of data access thwarts optimal capital allocation, with 42% also citing insufficient ability in data analysis.
CFOs will likely spend more on IT in 2021 than ever in response to forecasts that vaccinations will clear the way for strong economic growth.
IT spending worldwide will surge 6.2% this year to a record $3.92 trillion as CFOs speed up their pre-pandemic plans for digital transformation by at least five years, according to Gartner.
CFOs rank cloud enterprise resource planning (ERP) and advanced data analytics at the top of the list for information technology investment through 2024, according to a Gartner survey of 167 corporate finance organizations in North America, Europe, Middle East, Africa and Asia-Pacific.
Three in five CFOs cited a shift in customer demands as the biggest challenge during the pandemic, with 54% also noting an inability to accurately forecast future business performance.
The transportation and restaurant sectors urgently needed to improve their capital allocation process in response to the coronavirus while sectors such as technology and life sciences enjoyed “increased demand and a financial windfall,” EY said.
Still, most CFOs are completely rethinking their capital allocation strategy or process, EY said, noting that health care providers turned to telemedicine, manufacturers enacted new health and safety measures and most companies shifted to remote work.
CFOs may want to consider improving communication with investors and analysts, EY said, adding that only 55% of CFOs describe their capital allocation strategy to such stakeholders.
Fifty-three percent of CFOs say their capital allocation process is not always followed, and fewer than half say they can assess market threats and opportunities and alter planned investment accordingly, EY said.
“The lack of confidence in their capital allocation strategy, combined with the shortage of capital to fund all projects, underscores the need for companies to refocus their portfolios on their core business, carefully choose which initiatives to fund and address potentially long-term changes to their market,” EY said.
EY surveyed financial executives at companies with revenues exceeding $500 million in the U.S., Canada, U.K., France, Germany, China, India, Japan and Australia. The companies are involved in advanced manufacturing, retail, technology, telecom, automotive, life sciences, health care, media and entertainment, consumer products, transportation and mobility as a service.