Finance leaders are on the corporate front line, helping their companies navigate a health and economic crisis whose duration is uncertain. PwC’s biweekly CFO survey tracks how these executives view a COVID-19 world — and the actions they are taking to respond.
This survey, our third since emergency lockdowns took effect in the US, reflects the views of 313 US finance leaders during the week of April 6. It was a week when unemployment claims surged — totaling 16.8 million since mid-March — and focus turned to the emergency loan program for small businesses as a part of the $2+ trillion coronavirus relief bill.
Focus is on financial impact
This is the top concern as businesses shift to managing through a liquidity crunch and recession.
Time to recover lengthens
Just one in five finance leaders now expects their company to bounce back within a month after the crisis ends.
Clampdown on costs continues
More CFOs anticipate workforce reductions, with 26% of respondents anticipating layoffs in the coming month.
Stimulus impact is assessed
Half of respondents are preparing to opt in to government relief programs.
Financial impacts of COVID-19, including on liquidity and capital resources, rate as the top concern. Businesses are actively dealing with the effects of a sharp drop in economic activity and are assessing the lasting effect on recovery scenarios. There is little doubt that the US economy has downshifted into recession after a month of partial shutdown. Economists are revising forecasts for second quarter US GDP, with projections from the Conference Board for a contraction in the US economy in 2020 between 3.6% and 7.4%.
After evaluation of forecast revisions and supply chain disruptions, US finance leaders now have a more detailed understanding of the impact of COVID-19. It is substantial, with 74% braced for a potentially “significant” impact on their operations.
As the depth and breadth of the impact becomes clearer, more executives are able to base their outlooks on facts rather than sentiment. Two weeks ago, 87% of CFOs in the US and Mexico expected a “significant” impact. Currently, with China slowly coming out of lockdown, finance leaders are gaining insights into a post-COVID-19 world, which includes changes in consumer behaviors. It’s a start, but even though visibility is improving, the survey findings continue to reflect CFOs’ unease with current conditions. While models can predict slowdown of the rate of infection, for example in New York, the US epicenter, the potential for resurgence and diverging contagion trajectories are confounding hopes for a clear conclusion to the crisis. As a result, businesses continue to target costs as revenue outlooks adjust, as well as making difficult decisions about staffing.
Hopes that the outbreak will dissipate quickly are receding. Only one in five respondents now believes they’ll be back to business as usual within a month once the outbreak ends. In contrast, during the week of March 9, as “shelter-in-place” orders started taking hold in the US, 66% of US and Mexico respondents estimated that their companies could recover within a month.
The rapid change in sentiment is not surprising, and it reflects a mounting personal and economic toll as the crisis deepens. Businesses also recognize that priorities set during lockdowns could have long-lasting effects on ways of working and business models. Workforces have been scattered, and customer interactions have been affected. This will complicate recovery time frames for many companies, which must also try to predict what business as usual will look like once the outbreak ends, including what aspects of life under lockdown might persist. For example, PwC surveyed more than 1,600 adult consumers in the US and found that half are trying different grocery brands, and many expect their new health and wellness behaviors to last.
Finance leaders continue to evaluate ways to pull back discretionary spending. Processes are being put in place to tighten approvals for new spending — even among businesses that are well-capitalized. Cost management is also extending into investment programs as revenue expectations adjust: 67% of US leaders surveyed say they are considering deferring or canceling planned investments. Survey findings show that companies are also exploring a range of financing options, including government loans.
The broad focus on cost containment raises prospects of more disruptions for companies to consider as they run worst-case scenarios to assess impacts on the cash position. Finance leaders are also prioritizing what programs to protect. For example, respondents who are looking at where to lower spending do not want to cut investments in digital transformation, customer experience or cyber/privacy. Facilities and general capital expenditures on the other hand, are hard to justify now, and 82% of US finance leaders are considering containment measures in this area.
Half (49%) of finance leaders surveyed say their company plans to take advantage of various government relief programs, most notably the $2+ trillion stimulus package that includes loans, loan guarantees, grants, assistance payments, contracts and tax incentives. Among the leaders who expect to make use of these measures, 81% expect to defer tax payments, which again points to the importance of managing cash and liquidity through the crisis.
These findings indicate that many companies are exploring eligibility for loans and/or modelling the impacts of the tax incentives. This is not surprising, as not all of the programs had come online during the week of April 6, even as Congress debated augmenting funds for small businesses. The policy environment is active in the US and internationally. Nine of the largest economies (measured in terms of GDP) have enacted some combination of stimulus programs to prop up the economy during this period.
Businesses will need to stay on top of the continued actions being taken by governments and financial services regulatory agencies to support their economies and markets. More payments programs are coming up to help businesses get access to cash. The Federal Reserve's $600 billion program, which will work through banks, is intended for medium-sized businesses that meet an employee or revenue threshold, and the IRS expects to start sending stimulus payments to qualifying Americans in mid-April.
Companies will need to make quick decisions on whether to opt in and must ensure they can meet the requirements and remain compliant with funding access restrictions.
In an indication of mounting cost pressures on companies, 26% of finance leaders say their company expects layoffs over the next month, and 41% expect furloughs. This marks a significant change. Two weeks ago, only 16% of leaders in the US and Mexico expected layoffs, while 44% expected furloughs. Separation of the workforce, or layoffs, is typically considered a means of last resort.
Findings show labor supply constraints, too. Close to half (46%) of executives anticipate that a lack of remote work capabilities will lead to productivity loss, and 19% expect insufficient staffing to result in an inability to accomplish critical work.
Companies are preparing for a longer recovery, which is forcing difficult decisions around staffing. Rising unemployment will likely amplify people’s fears and anxieties. Companies can make their employees’ well-being and mental health a priority and point them toward resources that can help them through this crisis, including benefits the organization may offer, such as counseling or stress management options. Upskilling and retraining may help ease the pain, and leaders have an opportunity to help furloughed employees (and those whose hours have been reduced) by offering education, retraining and upskilling benefits. It’s a responsible way to lead, and it will help people — and ultimately society — by preparing them for new, better jobs in the future.
Respondents who are considering taking financial actions as a result of COVID-19 report that they’re more likely to consider cost-containing measures or to defer or cancel investments than to change their company's M&A strategy. Moreover, 34% of finance executives report that COVID-19 has not affected their M&A strategy and another 22% say it’s too difficult to assess right now.
Unless they have a deal in progress, companies can afford to be more thoughtful about their M&A strategy and hold off decision-making until there’s more clarity in the market. Despite increasing market uncertainty, some dealmakers realize there’s still capital available to make deals. That’s the outlook of the 17% of surveyed CFOs who indicate they have an increased appetite for deals. PwC studies have shown that these dealmakers could enjoy better returns than their peers.
Companies are also using this time to proactively manage their portfolios. While CFOs are considering more immediate needs, they’re also asking questions such as: Is my company the optimal owner of X asset or Y business unit? Or is this the right time to divest and pursue assets that can transform my company or lock in growth for years to come?
Companies are working to mitigate the immediate effects of the crisis on their supply chains as they sort through the risks and operations issues they identified in the first stage of the crisis. Thirty-nine percent of US respondents also say they are evaluating their supply chain to improve its resistance to future disruption. Many are starting to model recovery scenarios to ensure they have the right set of options to match supply and demand.
Companies are getting more visibility into what their recovery will look like as many manufacturing operations in China and Southeast Asia have more fully come back online. They are also thinking through resilience with lessons learned about risk warning systems, visibility into supplier financial health and exposure to single sources of supply among the issues to surface during the crisis. As companies assess their vulnerabilities, they are realizing the need to make adjustments to the operating model to improve flexibility and produce more comprehensive data earlier to support decisions that work around or mitigate risk near and long term. It remains too soon to say whether large-scale sustained adjustments will be made, given how costs have been optimized and the expenses involved in making physical moves. Diversification of risk will likely begin by being more purposeful in new product manufacturing site selection, creating pre-approved second sources of supply and improving supplier financial health diligence work. New government regulations and consideration of the impact to legacy communities will also be factors for making any modifications to the supply chain models.
The impacts of the pandemic on financial reporting are becoming more apparent: Just 13% of US respondents say it’s currently difficult to assess what changes, if any, will need to be made to disclosures. This marks a decrease from survey findings two weeks ago, when 24% of finance leaders said the same.
Most companies will face a challenging period ahead as they close the books remotely and prepare financial statements. They may have new or different financial reporting matters to consider, and some may have to deal with lower materiality thresholds based on company performance. In fact, 81% of surveyed CFOs expect a decrease in revenue or profits (or both) this year as a result of the pandemic. The extent of the impact will amplify potential impairment and business viability financial reporting considerations for many companies.
These executives are also dealing with changes in accounting and reporting issues, such as contract modifications, judgments and estimates, as well as disclosures of liquidity issues, going concern and other risks. Audit committees have an important role to play when it comes to helping boards and organizations stay focused on what matters, but in order to do so, they need to have a clear picture of their own role during this unprecedented global crisis. Among other actions, the SEC has provided extensions to filing deadlines while encouraging companies to disclose the impact of the crisis on their businesses. We will likely see extensive disclosures of the impact of the crisis in upcoming financial statement filings.
Consumer-facing companies have been among the hardest hit — as mandated stay-at-home orders combined with economic uncertainty have brought consumer spending to a halt for all but essential products and services. In fact, more (50%) consumer markets (CM) CFOs listed a decrease in consumer confidence leading to reduced spending as a top-three concern versus 39% in all sectors. CM CFOs report a higher level of concern than other industries, with 83% citing "significant impact and is causing us great concern," versus 74% overall. They also anticipate it taking longer to get back to “business as usual” when COVID-19 ends, with 33% saying they expect it will take 6 months or more, compared to 18% across all sectors.
As a result, CM CFOs say they are far more likely to consider deferring or canceling planned investments (85%) compared to 67% across all sectors. They are also more likely to take advantage of government programs such as the CARES Act (63%) versus 49% across all sectors. Almost all of them — 97% — say they are planning on or considering tax deferral options, compared to 81% across all sectors. They’re also more likely (24%) to seek economic relief from government programs at the state and local level than others (14% overall).
CM CFOs expect to encounter a variety of workforce challenges over the coming month, including insufficient staffing in subsectors that provide essential goods and services (37% versus 19% across all sectors). At the same time, they are planning to furlough or layoff other workers due to lack of demand in certain subsectors, such as retail, travel, transportation and hospitality: 57% anticipate furloughs, versus 41% across all sectors. And 30% anticipate layoffs, in line with the 26% for all companies.
Consumer-facing companies have been hard hit by the sudden, sharp impact of COVID-19. They are buckling down for a potential prolonged recession. Meanwhile, consumer habits are evolving in response to stay-in-place mandates, with more spending moving online. That’s likely to have long-lasting effects, prompting changes in business models.
US industrial products (IP) companies are struggling on several fronts, including reduced demand, supply chain bottlenecks, production slowdowns (or even shutdowns), and workforce payroll and safety issues. The immediate consequences appear grim, with 81% of sector CFOs expecting decreases in revenue and/or profits. Meanwhile, IP companies are aggressively trying to preserve cash liquidity, with 87% taking cost-containment measures and 67% canceling or deferring investments.
The pervasive cost-cutting is not leaving workers unscathed. In the next month, 59% of IP CFOs expect temporary furloughs (versus 41% across all sectors), and 36% expect layoffs (versus 26% for all sectors). When asked how long it would take for their businesses to return to business as usual if COVID-19 were to end today, 41% of IP execs predict it will take from three to 12 months.
IP companies, including those in manufacturing , automotive, chemicals, and aerospace and defense, are doing everything they can to weather the COVID-19 crisis. But will that be enough? The answer will likely hinge on how long those measures will need to remain in place, how long companies can remain cash positive, and how quickly demand for industrial products will return when the economy recovers. Looking farther ahead, how easy (or difficult) will it be to rebuild workforces in a rapid and smooth way? As lessons from the 2008 Recession taught us, companies will need to prepare for this challenge in order to accommodate production capacity that can meet recovered product demand after the COVID-19 crisis ends.
COVID-19’s economic effects, including low interest rates and strained financial markets, are starting to hit the bottom line of many financial institutions. Almost all (92%) of the FS CFOs surveyed now expect their revenues and/or profits to decline this year; higher than results across all industries (81%). But the FS industry seems to have an eye on the future: Only 55% are considering deferring or canceling planned investments as a result of this crisis, compared to 67% of all sectors.
Today’s financial system is far more resilient than it was in 2008. Many of the structural reforms put in place have led to increased oversight and larger reserves. These are designed to strengthen our ability to withstand systemic shocks and, by all accounts, they seem to be working. The financial services industry is a bellwether for the broader economy. If investors pull back from the market, or if businesses stop borrowing, FS CFOs feel the results. But many firms are still investing as they start planning for future growth. FS firms, including asset and wealth management, banking and capital markets and insurance, have been going through a rapid digital transformation. They’ve also been updating operating models, adapting to changing regulations, and finding growth through both organic and inorganic mechanisms. The stakes are high. Once the COVID-19 situation stabilizes, firms may not be able to compete if they haven’t built systems, products, and processes that meet client demands in the “new normal.”
Technology, media and telecommunications (TMT) companies are powering the shelter-in-place economy, as consumers seek information, entertainment and solace online, often while working or studying remotely. Regardless, TMT CFOs are exercising caution. They are more likely to be considering implementing cost-containment measures (93%) compared to 82% across all sectors.
TMT companies also intend to cut spending where the impact will matter less in the short term. R&D has always been front and center for TMT companies, as have worker protections. Of those that said they're considering deferring or canceling planned investments, more (36%) of TMT CFOs said they're considering deferring or canceling R&D than those in all sectors (27%). Their flexible, resilient business models are designed to pivot back when it's time to boost investment again.
Of all industries, TMT companies may be better positioned to ride out the worst of the fallout from COVID-19, as consumers shelter in place with their products and services. But even while demand is currently high for products that support remote work, online education and social distancing — from both consumer and enterprise customers — TMT leaders are aware that a potential global recession could depress demand in the future. In response, technology, media, and telecommunications companies are making moves to contain costs and defer investments until they have a better sense of what the recovery will bring.
Finance leaders are preparing for a recessionary environment, forcing many to make tough decisions around costs and staffing. Helping people feel more prepared and informed by being transparent about the health of the company is crucial. Company leaders who are forthright about the decisions the leadership team is making — and how the workforce may be affected — can build trust by helping people stay informed, even if the news isn’t good. Trust and transparency are also a key part of stakeholder management. The situation is uncertain, and nobody can be sure what will happen, but providing regular updates means stakeholders won’t be caught off guard.
As the crisis unfolds, we will continue to track leadership’s efforts in future installments of PwC’s COVID-19 CFO Pulse Survey.
To help identify the business and economic impact of COVID-19, PwC is conducting a biweekly survey of finance leaders in the US, Mexico and 19 other territories. Of the more than 300 CFOs surveyed in the US between April 6 and April 8, 2020, 84% were from public and private companies in these top four sectors: financial services (27%), technology, media and telecommunications (19%), industrial products (22%) and consumer markets (15%). The next set of results will be released on April 27, 2020. Sign up to receive regular survey updates.