Middle market chief financial officers are facing widespread shifts—from trade wars to digital disruption—but they aren’t backing down from the challenge. According to BDO’s 2020 Middle Market CFO Outlook Survey, 56% of middle market CFOs expect a recession by 2021, but they are forecasting positive performance and forging ahead with growth plans.

Getting in the Growth Game, Not Sitting on the Sidelines

When it comes to growth plans, more than half of middle market CFOs (54%) are prioritizing digital transformation, while product or service expansion (53%), geographic expansion (41%) and restructuring or reorganization (38%) are also primary areas of focus.

At the same time, CFOs see the need to invest internally, saying they will increase spending on IT, R&D, marketing & sales, finance & accounting, customer service, risk management and HR.

These investments and growth plans are expected to pay off: 81% expect revenues will increase, and 77% say profitability will increase.

The Quadruple Threat of 2020: Tech Transformation, Trade, Tax and Talent

Tech Transformation

Middle market CFOs are balancing innovation with risk and investing in IT infrastructure in order to scale and secure their businesses—seven in 10 CFOs plan to increase IT spending. CFOs are rightfully acting against top identified threats: a data privacy breach and falling behind on tech innovation. IT and information management are also noted as top challenges for the finance department.

Trade

The economy and the impending presidential election top CFOs’ list of geopolitical challenges. Trade is ranked third on CFOs’ list of geopolitical challenges and is intertwined with both the economy and election. In fact, more than 1 in 4 CFOs say trade and tariffs are their top policy issue in the 2020 election.

2019 was characterized by unending shifts in trade policy, particularly with key partners like Mexico and China. The administration vacillated between tariff positions, leaving many companies shouldering additional costs and extreme uncertainty. While a “phase one” deal with China was signed and supply chain reorganizations or exemptions may provide relief, for many businesses, trade remains an existential threat.

Tax

The reduction in the corporate tax rate was a boon to many, but middle market CFOs are still struggling to implement tax reform changes and subsequent guidance. One in 5 CFOs say tax policy is their biggest regulatory issue. Nearly one-quarter of CFOs (23%) say adopting new guidance on federal tax reform is their top tax challenge, more than transforming the tax function (21%) and navigating shifting trade and tariffs policies (18%). Regardless of the results of the impending presidential election, it is likely additional changes are on the horizon.

Talent

Achieving CFOs’ aggressive growth goals in a low unemployment environment requires a keen focus on talent strategy. Recruiting and retaining top talent is the second most cited business priority of CFOs. The battle for talent will be hard fought: Increasing labor costs (21%), shortage of skilled workers (18%), retaining key talent (17%), training & development (17%) and attracting new talent (17%) are the primary workforce challenges.

Findings for individual industry segments are explored in BDO’s seven CFO reports and include:

• Energy: The BDO Energy Survey finds that energy executives are focused on striking a balance between navigating short-term pressures—including low oil prices, decreased capital access and trade policy disruptions—with long-term planning for a greener future. And while most energy companies have plans to expand into renewables, according to energy CFOs, it will be at least five years before renewables start to make up a significant part of their businesses.
• Healthcare: When it comes to healthcare, patients aren’t the only ones in distress over how to pay for it—their providers are, too. Providers fear a near-term recession amid increased concerns about reimbursement uncertainty and liquidity challenges, according to the BDO Healthcare Survey. To mitigate these concerns and gain access to funds needed to transform, many provider organizations are turning to innovative sources of capital.
• Life Sciences: R&D is the lifeblood of life sciences, requiring high costs but delivering high rewards—successes in gene therapy among them. But ROI is declining, and public pressure is growing to curb product prices as consumer lifespans and aging populations increase. At an inflection point, the industry must plot out a more sustainable path forward for innovation. To do that, many life sciences organizations are turning to outcomes-based arrangements, the BDO Life Sciences Survey reveals.
• Manufacturing: The BDO Manufacturing Survey finds that while middle market manufacturing CFOs are leery of a potential economic downturn, they remain optimistic about their growth prospects for the year ahead. Manufacturers may have to navigate trade turbulence and weakening global growth in the short-term, but it’s the larger tectonic shifts towards Industry 4.0 that are fundamentally changing the sector in the long-term.
• Restaurants: In the wake of new competition and a capricious consumer, the restaurant industry has become truly bifurcated, the BDO Restaurant Survey finds. Restaurant CFOs reveal their growth plans, how they plan to engage with sustainable food trends and what measures they’re taking to address key labor and margin pressures in BDO’s new report.
• Retail: The BDO Retail Survey finds that retailers are starting to get their bearings in a new economy. The confluence of savvy consumers, market volatility surrounding trade negotiations and ongoing digital disruption does not appear to be stifling them. In fact, 73% of retail CFOs consider their companies to be thriving—profitable and experiencing robust growth—and expect continued momentum in 2020.
• Technology: The BDO Technology Survey finds CFOs appear confident and ready to ride the wave of social responsibility and market volatility. In the 13th annual survey, tech CFOs call for more regulation, weigh private equity vs. IPO paths for growth and discuss threats from trade policy and China competition.

BDO’s Middle Market CFO Outlook Survey is a survey of 700 middle market CFOs in the U.S. The survey was conducted by Rabin Research Company, an independent marketing research firm, in November 2019. View the key findings and industry reports here.