CFOs risk growth for short-term targets

CFOs are cutting funding in long-term priority areas to meet short-term earnings targets amidst economic pressures, research finds.

However, such short-sighted moves could have long-term repercussions, prolonging the achievement of their objectives.

A 2023 EY survey of 1,000 CFOs and senior finance leaders worldwide found that 50% of respondents are diverting funding away from long-term priorities to meet short-term targets.

Economic challenges add pressure to hit short-term targets

The pressure to meet earnings targets comes as businesses globally grapple with economic challenges spurred by rising inflation and interest rates, impacting their cash flow.

Three-quarters (76%) of respondents stated that current market conditions have increased pressure to drive cost efficiencies and hit short-term targets.

Moreover, 90% of surveyed finance leaders plan to pause or reduce spending across several areas of long-term priorities.

Myles Corson, EY Global and EY Americas strategy and markets leader for financial accounting advisory services, notes the paradoxical nature of such a move. He says, “companies rightly focus on a number of areas, including investment in data and technology, ESG and sustainability, and talent.

These are things that drive long-term performance. At the same time, these are the areas that will get cut back when companies face short-term earnings pressure and performance, particularly in an economic downturn.”

Impact of diverting funding from long-term objectives to meet short-term targets

However, the move to reroute cash flow from long-term objectives to meet short-term earnings goals has caused friction among the leadership team.

Two-thirds (67%) of respondents reported tensions and disagreement within their leadership team on how to balance the two priorities.

After all, meeting short-term earnings targets may bolster investor confidence, but cutting down funding on long-term priorities could hamper the growth and development of the business.

“To get the full benefits of those long-term initiatives, companies need to continue their investment,” Corson explains.

“If they cut back, they experience drop-off. So, they have to start building momentum again. And so, their growth trajectory becomes jagged rather than a long-term upward trend, which is desired for sustained performance.”

Besides impacting the company’s growth, pulling investment from long-term priorities could also affect their relationship with talents, harming the trust they have built.

Corson says, “if companies tell people that they will invest in their learning, development, and skills enhancement programs but then cut back on it, they lose trust. And that trust has to be rebuilt.”

Employee trust is essential for companies. Trusted employees remain highly engaged in their tasks, boosting productivity for the companies.

CFOs must win stakeholders’ trust

Corson believes that building trust and confidence with investors is essential for continued investment in long-term objectives.

When companies fail to articulate the reasoning behind pursuing long-term strategies, stakeholders may be inclined to favour short-term deliverables, leading to the aforementioned disagreements among senior figures.

For Corson, the disagreement among senior figures is the externalisation of some of the inconsistencies organisations face.

To mitigate such a scenario, he believes clear communication with stakeholders and clarity on the strategy will be necessary.

“The leadership team has to reconcile and be clear on long-term priorities. They have to ensure alignment and that they are moving forward collectively to deliver on most or all of those priorities,” Corson says.

“I think this is going to translate into very clear and consistent articulation internally with the team and externally with investors.”

Transformation takes centre stage for CFOs as the role evolves

For the majority (37%) of respondents, technology transformation remains the most important priority for finance leaders to transform their function over the next three years.

Advanced data analytics ranked second, with 27% of respondents viewing it as the most important priority alongside sustainability.

The focus on technology and data comes as no surprise as organisations look to streamline their functions to boost efficiencies and revenues.

However, research shows that transformation is not without its challenges.

74% of respondents believe that traditional back-office behaviours and mindsets are slowing the function’s modernisation.

Traditionally, finance professionals have taken on a safeguarding role, protecting companies from financial challenges. They were seen to be risk-averse and conservative since they work with significant financial numbers, leaving them with little room for error.

Corson says, “finance professionals were trained with the mindset not to take risks and to be bulletproof in how financial numbers are prepared and controls around them.”

However, there has been a shift in perception, with finance leaders also entering the conversation on how to create values in addition to protecting and optimising the value of the organisation.

“We are now asking people to take on new skills, and increasingly, as technology will replace some of the more mundane routine tasks, finance professionals need to upskill,” he adds.

“So, what we are seeing is a lot of the EQ as well as the IQ. Therefore, interpersonal skills and communication are absolutely critical.”

High satisfaction and aspirations among CFOs

Despite the external and internal challenges and the evolving role of CFOs that see them take on more responsibilities, finance leaders remain highly satisfied with their position.

84% of respondents reported being highly satisfied with the CFO role despite the challenges.

Moreover, 47% of respondents see the CFO role as their long-term goal, with almost as many (45%) aspiring to take on the CEO position.

Corson says, “we start from a position that CFOs have a very high level of satisfaction. The role is rewarding. They find the breadth of the challenges that they are being asked to take on stimulating.”

“It is interesting that just under half saw CFO as a destination, but also just under 50% saw it as a great steppingstone into general management positions. And that is because of the broader operational experience the CFOs are getting now in terms of what they are being asked to take on.”

While the evolving role of CFOs has made them take on broader responsibilities and prepare themselves for the next step, Corson acknowledges that they face challenges in managing their workload and financing time and resources to upskill themselves.

For Corson, one of the ways CFOs can overcome the challenge is by relying on their team.

“I think one of the key things around that is the team that you build around yourself. So, how are you bringing the leadership team around you? How are you identifying high-potential talent? Once you have that, you can hand off some of those existing responsibilities to others, so you can free up capacity to take on the new roles you are being asked to fulfil.”

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