A new survey from Grant Thornton revealed interesting contradictions in how CFOs are approaching a time of high interest rates, stubborn inflation and fierce competition for talent.

On one hand, 58% of the 246 CFOs surveyed expect continued challenges in attracting and retaining the right talent. On the other hand, the top area cited for potential cost cuts was expenses related to employee headcount and compensation. In fact, 43% of CFOs said their organization is looking at this area for cost cuts. Meanwhile, nearly one-third (32%) of CFOs said they could potentially introduce layoffs or workforce reductions in the next six months.

“The companies that I’m talking to are all focused on cost reductions,” Sean Denham, Grant Thornton’s national audit growth leader, said. “Usually when people are focused on cost reductions, it’s because they don’t have a positive outlook on the future.”

That said, Grant Thornton’s Q3/22 CFO survey included some cause for cautious optimism — at least compared to the previous quarter. Forty-five percent of CFOs said they are optimistic about the outlook for the U.S. economy over the next six months, while 31% are pessimistic. The 45% optimism rate was up from 39% in Q2/22 but still far below the 69% optimism rate recorded in Q3/21. At the same time, nearly two-thirds (64%) of CFOs interviewed for the new survey predicted net profit growth at their organizations over the next 12 months, with 42% predicting growth of 6% or higher.

Furthermore, 71% of CFOs said the economic impact of the COVID-19 pandemic is waning and that they believe household wealth will continue to drive demand. But that demand may be greater for goods and services with budget-friendly prices that consumers see as necessities, whereas luxury items may experience a decrease in demand.

“Bigger-ticket items in the luxury category will likely take a hit as we turn into 2023,” Enzo Santilli, Grant Thornton’s chief transformation officer, said. “While demand for middle- and lower-income jobs is still very strong, higher-income workers are at greatest risk of recessionary layoffs. We are already seeing this with the technology and financial sectors trimming their workforce. Some are calling this effect the ‘richcession.’”

Cost Control the Main Focus

In Grant Thornton’s latest CFO survey, cost optimization overtook cybersecurity as the prevailing area of concern. Specifically, 58% of respondents listed cost optimization among their top three areas of concern for the next six months, and 40% chose workforce rationalization as one of their top three concerns. Liquidity and capital expenditure management were each chosen as a top three concern by 37% of CFOs, while cybersecurity was selected by a little over one-third (34%).

For many companies, cost optimization may be accomplished without layoffs. For instance, external consulting (42%) and technology investments (41%) were cited as areas for potential cuts. Additionally, 38% of CFOs said they expect travel expenses to decrease over the next year. That’s the highest percentage since Q1/21.

M&A Volume Could Rebound

Meanwhile, mergers and acquisitions (M&A) activity could trend upward: The recent economic downturn has the potential to put the brakes on climbing valuations. Pair that with the 72% of M&A professionals expecting deal volume to increase over the next six months in Grant Thornton’s latest M&A survey, and M&A deal volume could increase — at least in certain industries.

Christopher Schenkenberg, the national managing partner of Grant Thornton’s regional tax business lines, recently asked several private equity professionals their views on rising interest rates and the impact on deal values, the cost of capital and the M&A market in general.

“The sentiment is that M&A volumes are down year over year,” Schenkenberg said, “And while rising interest rates certainly affect the cost of capital and investment models, recent decreases in valuations and multiples have a positive effect in some industries.”

Supply Chain Concerns Linger

Although ports are no longer jam-packed with backed-up goods, the percentage of CFOs who rated the supply chain as a top challenge was higher in Q3/22 than in any of the previous six quarters. Specifically, 41% of respondents rated the supply chain as a top three challenge.

Denham believes old supply chain challenges have been supplanted by new troubles related to rising interest rates. During the pandemic, stockpiling inventory became an answer to the previous supply chain difficulties. But now, as the cost of capital continuously rises, stockpiling becomes ever more expensive.

“When the cost of capital was close to zero, companies could put all the inventory they want in their warehouses,” Denham said. “Now that interest rates are going up, they have to decide whether to increase inventory because of potential supply chain issues. The cost of that is going to be a factor.”

Supply chain challenges were followed by cash and liquidity (31%), the remote workforce (30%), cybersecurity risks (30%) and tech upgrades (29%) on the list of major challenges facing finance leaders. These challenges reveal a notable trend: CFOs are trying to maintain healthy balance sheets by deciding just how much to invest in key areas.

“As always, CFOs are walking a tightrope, but they’re cautiously optimistic,” Denham said. “They must treat this moment as a reflection point to best serve their business.”