With the first month of the new year drawing to a close, CFOs are consolidating their plans for the new year in what is “proving to be a decade of disruption,” said Wes Bricker, vice chair, US Trust Solutions co-leader for Big Four firm PwC.
Financial professionals have navigated numerous challenges over the past few years beginning with the COVID-19 pandemic, changes to the way we work, and continued inflationary pressures, all of which provide a backdrop to what could potentially unfold this year, Bricker said in an interview.
With that in mind, the economy “will be front and center in 2024,” he said, with finance chiefs focused not only on determining their pricing strategies, product development and profitability but on assessments surrounding the cost of capital and liquidity. This focus could lead to a number of changes, including a coming jump in M&A deals as well as a renewed focus on digital transformation.
Getting comfortable with high rates
The uncertain future surrounding interest rates is one of the factors leading the economy to be top of mind for CFOs, as the Federal Reserve continues its bid to dampen inflation to its 2% goal.
The Fed has raised the federal funds rate to a range between 5.25% and 5.5%, with officials noting that they need to see a sustained decline in pricing pressures before cutting rates, CFO Dive previously reported.
While there have been encouraging signs that such pressures may indeed be easing, predictions from economists regarding a coming recession have seesawed in recent months as they weigh conflicting data. U.S. retail sales rose 0.6% last month, bucking expectations of declining consumer spending and raising concerns that the Federal Reserve may not begin slashing rates as early as many thought.
For finance chiefs tasked with balancing revenue growth and risk management, that means they will continue to deal with a higher cost of capital in the new year. Those CFOs “are stepping back, are rescaling, looking at new scenarios, and now adjusting” in the new year, Bricker said.
This could contribute to an uptick in events such as M&A deals, which saw a slump over the past year as the cost of capital increased. A recent study by Big Four firm Deloitte found that finance chiefs are looking towards both M&A and new technologies to bolster their growth as they head into 2024, CFO Dive previously reported.
“CFOs are now becoming more comfortable in allocating capital in those higher rate environments,” Bricker said. “And that's what we'll see contributing to M&A. We'll see that also contribute to transformation.”
A potential M&A rebound in the new year would follow a significant slump in such deals over the past two years, with dealmakers facing their most prolonged set of challenges since the 2008 crisis, CFO Dive previously reported. Part of a coming spike could be due to some pent-up demand in the M&A space, as well as optimism surrounding interest rates easing, but the rising prevalence of new technologies could also have an impact.
“There's a more stable point of view about the pervasive impact of technology, because CFOs never want to buy a business built on old technology, and then they have a big rehab on their hands,” Bricker said.
He likened the scenario to buying an old house, where the buyer would need to significantly overhaul and modernize everything that’s come with the house since it was built. Acquiring a business that is running on outdated technologies can create similar speed bumps for companies, and “if you're acquiring a bunch of tech debt, they have to model that in, and it's incredibly costly in a higher rate environment,” Bricker said. “So I think that's changed, there's a lot more stability in understanding, number one, what it is we're buying and two, the cost.”
Finding the transformation middle ground
As they juggle uncertain macroeconomic factors and weigh the pros and cons of new deals, finance chiefs and the rest of the executive team are also continuing to sketch out new strategies for transformation — something that has been on the CFO priority list for some time, but has achieved new importance following the advent of generative AI in November 2022.
Many companies and their finance leaders are looking to new technology products or uses to help boost revenue, therefore, as they deal with changing customer expectations for tech-forward — but crucially, safe and secure — experiences. Many businesses are either already taking or need to take “a fresh look at the technology and the digital experience, focusing on customer data and privacy, protection of their customers,” Bricker said.
Companies also need to be sure they are “understanding the role of AI and being responsible in the deployment of AI in that relationship,” he said. “Both of those things when you get it right, can expand revenue. And when it's wrong, it can really erode value pretty quickly.”