2014 CFO Outlook

by BofA May/Jun 2014

Empowered by growing confidence in the economy and their own company performance, 94% of CFOs say they plan to pursue new growth strategies in 2014. But creating momentum doesn’t mean throwing caution to the wind.

Positive Economic Momentum

Economic Engines Ready for Higher Performance

Q: How would you rate the current state of the U.S. economy and the world economy?

CFOs are more positive about the U.S. and global economies than they’ve been heading into any year since the onset of the economic recession in 2008. Once again the U.S. economy rated highest of all global economies, at 53 out of 100, representing a four-point improvement over the start of 2013, and nine points higher than 2012. This upward trend mirrors steady improvement in housing, stocks, employment, sales and other key U.S. economic indicators. The global economic rating also rose five points year over year, from 45 to 50, and has gained seven points since 2012.

Q: Do you think the U.S. economy will expand, contract or stay the same in 2014?

Forty-seven percent of CFOs are optimistic that the U.S. economy will expand in 2014, up from 39% previously, while 40% expect the economy to maintain its ground. The percentage of CFOs predicting economic contraction shrank from 24% in 2013 to 12% in the latest annual survey, another signal of dissipating economic fears.

Q: How would you rate your concern about the potential impact these factors will have on the U.S. economy in 2014?

Three primary economic concerns remain top-of-mind for CFOs in 2014, which they have cited in varying order for the past three years: Healthcare costs (67%), effectiveness of the U.S. government (62%) and the budget deficit (57%).

Sales – Along With Costs – Ringing Up

Increased Sales, Hiring – and Labor Costs

Q: Will your company’s sales be higher, lower or about the same in 2014?

Responding to a new question added to the 2014 CFO Outlook, 54% of U.S. finance chiefs predicted that their company’s sales would be higher in 2014, while 37% anticipated no change and only 8% foresaw lower sales. How far will sales rise? Two-thirds of CFOs expect up to 10% sales growth, while 15% expect sales to grow in excess of 10%.

Q: Which best describes your company’s employment of full-time workers in 2014?

Nine out of 10 U.S. companies are maintaining or increasing the size of their workforce in 2014. Nearly half (47%) are hiring additional full-time employees, 43% will hold current staffing levels and 7% anticipate layoffs. In addition, 8% of companies plan to shift some full-time workers to part-time status and 5% will replace some full-time workers with contractors.

Q: What are the key reasons you plan to outsource work to contractors?

The two most cited reasons for outsourcing work to contract employees are a lack of available qualified workers (39%) and uncertainty about escalating healthcare/insurance costs (27%).

Q: Do you plan to outsource work to contractors in 2014, and will it be more, less or the same amount of outsourcing as you did previously?

Despite the projected rise in labor costs, 62% of companies do not plan to outsource work to contract employees in 2014. Among businesses that do plan to outsource work to contractors, most say that it will be about the same amount as in 2013.

Q: To comply with the Affordable Care Act, do you anticipate that your labor costs will increase, and by how much?

More than half of all U.S. companies (53%) report that their labor costs will rise to cover the costs associated with the Affordable Care Act. On average, companies are expecting their labor costs to increase 7.4% in 2014.

Q: Which of the following measures is your company planning to take to offset these costs?

Increasing how much employees pay for healthcare is the number-one way that most companies (77%) plan to offset their escalating labor costs, followed by cutting spending in other areas (75%). Many companies are also planning to implement preventative healthcare programs (71%), and raise prices on their products and services (63%).

A Proactive Game Plan

Shifts to Grow Market Share, Add Customers and Expand Offerings

Q: Which of the following growth strategies, if any, will your company implement to meet its 2014 objectives?

Ninety-four percent of U.S. companies intend to implement one or more growth strategies in 2014, led by selling customers more existing products or services (82%). Cultivating new customers or markets is the second most popular plan (77%), followed by introduction of new products or services (59%) and acquiring another company (25%).

By expanding their offerings, companies are leveraging their brand equity to bring something new to customers, a possible sign of growing corporate confidence. Similarly, acquiring another company is an aggressive growth strategy that requires both fiscal confidence and strength.
Q: Where is your company expecting to grow in 2014?

While most companies pursuing growth strategies in 2014 say the growth will be all domestic (64%), one in five predict mostly domestic growth with some international expansion. Of the remaining U.S. companies, 15% believe growth will either be geographically balanced or entirely overseas.

Q: If you are introducing new products or services, will they be an extension of your current offering, a diversification or both?

Half of the companies that plan to grow by launching new products or services say their offering will extend an existing product or service line, and 42% report that the new offering will represent both an extension and diversification of their current products or services. Only 7% will be introducing an entirely new product or service.

Q: Is your acquisition strategy more likely to target a competitor, supplier, distributor or some combination of these?

Among those companies planning to make an acquisition in 2014, 85% expect to buy a competitor, while 28% will acquire a supplier and 18% a distributor.

Q: Are your company’s R&D expenses going to be higher, lower or about the same?
Seventy-two percent of CFOs report that their 2014 R&D expenses will be about the same as they were in 2013, 19% are forecasting year-over-year increases and 8% are cutting their company’s R&D levels.
Q: Which best describes your company’s level of capital expenditures in 2014?

One-third of companies plan to increase capital expenditures in 2014 to maintain or increase the scope of their operations, a positive sign for future growth prospects, while 43% will keep their capital expenditures steady, and 21% plan to spend less on adding or enhancing fixed assets. Virtually no companies plan to hold off on capital expenditures, compared to 8% that planned to refrain in 2013.

Nearly half of all companies planning capital expenditures (48%) say they will use it for a combination of acquiring or improving fixed assets, from buying land, new buildings, machinery or vehicles to improving or expanding an existing building.

Q: What factors in the marketplace would cause your company to pursue growth more aggressively?

CFOs cite a variety of factors, which reflects the diverse range of businesses that participate in the study. The leading response was a reduction/stabilization in government regulations (12%), followed by acquisition, business or competitive opportunities (10%) and increased demand for products (10%).

At the Forefront of Opportunity

Global Customers, Suppliers and Revenue

Q: Do you sell to, buy from or have operations in foreign markets, or plan to in 2014?

U.S. manufacturers are the most active internationally, with 83% doing business abroad. Seven out of 10 manufacturers sell to foreign markets or are planning to in 2014, while 66% buy or plan to buy internationally and 39% currently have or plan to have operations in foreign countries.

Q: What percentage of your revenues will comprise international sales or operations?

As the most active business segment in other countries, it follows that U.S. manufacturers project the highest percentages of revenues coming from their international sales or operations in 2014. Sixty-seven percent of manufacturing companies expect international sales to account for 11% or more of their revenues.

Q: Will your percentage of international revenue be higher, lower or the same as previously?

Manufacturing and non-manufacturing companies appear confident in the international gains they’ve made, as more than 90% of all CFOs said their revenues from international sales or operations will stay the same or increase in 2014.

Editor’s Note: The foregoing was edited for presentation purposes. The full report and accompanying webcast are available at www.bankofamerica.com/cfooutlook.

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Terry Mulreany
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