Recently, both CFO Research and PwC conducted surveys of finance executives to elicit information about how they were navigating the economic crisis resulting from the COVID-19 pandemic. Not surprisingly, their responses indicated concerns regarding the effect on revenues of a compelled decline in economic activity—projections from The Conference Board indicate a sharp contraction in the U.S. economy in 2020 between 3.6% and 7.4%—as well as liquidity pressures. The results may provide some insights for purposes of disclosure and financial reporting. Remarkably, perhaps, there was a hint of optimism about a potential recovery (or were they just putting on happy faces)?
The CFO survey was conducted between March 26 to April 2 and was based on responses from 333 senior finance executives, 52% of whom were CFOs and 14% of whom were CEOs, presidents or managing directors. The PwC pulse survey was based on responses from 313 U.S. finance leaders between April 6 and April 8. In the U.S., 84% of the respondents were from public and private companies in four sectors: financial services (27%), technology, media and telecommunications (19%), industrial products (22%) and consumer markets (15%).
In both surveys, finance executives said that they expected big hits to revenues (which is already on display in early earnings announcements) and were striving to conserve cash. In the CFO survey, the three most pressing concerns were the duration of the downturn (68%), cash flow (66%) and weak customer demand (43%). The impact of COVID-19 on results of operations, liquidity and capital resources was also the top concern (75%) in the PwC survey, with a potential global recession close behind (70%), followed by the effect on the workforce/reduction in productivity (41%).
To address liquidity and cash flow concerns, 77% of finance executives in the CFO survey said they were discontinuing all discretionary spending, while 50% “were stretching out their accounts payables, 16% were cutting employees’ salaries, and 13% suspending executive bonuses. Several indicated that there would be ‘no investment of any kind’ in 2020.” In the PwC survey, finance executives said they were exploring “ways to pull back discretionary spending, with 67% of respondents looking at deferring or canceling planned investments, including facilities/general capital expenditures (82%), workforce (67%), operations (55%) and IT (53%). However, CFOs appeared to be reluctant to cut back on some investments, with only 27% planning to cut R&D, digital transformation (25%), customer experience (15%), ESG (10%) or cyber/privacy (2%).
With regard to access to capital, about a quarter of finance executives in the CFO survey had already accessed financing sources, including existing lines of credit, and about the same percentage were considering that action. PwC looked at recourse to government funding, reporting that 49% of finance executives were looking at the availability of various government programs, including tax payment deferral or extension of deadlines (81%), other tax provisions (e.g., modifications to NOL limits, temporary amnesty if taxes are overdue) (42%), loans and loan guarantees (35%) and flexible benefits for employees as a result of mandatory reduced hours, furloughs or layoffs (27%). Only 12% were looking at government grants or emergency funding.
While finance executives in the CFO survey said that employee health and safety were top concerns, nevertheless, 35% said that they were laying off or furloughing workers, and 41% did not know how many employees would be affected. In the PwC survey, 26% of respondents were expecting layoffs over the next month and 41% expecting furloughs. In addition, 42% expected higher demand for employee protections (including sick leave policies, increased demand for benefits, anti-discrimination). At the same time, 19% anticipated that insufficient staffing would impede the company’s ability to accomplish critical work and 46% expected that a lack of remote work capabilities would lead to productivity loss.
The PwC survey ventured into a few other areas as well. With regard to M&A strategies, 27% of respondents indicated that the pandemic had reduced their appetites for M&A, but 34% said that it had had no effect. PwC also asked about supply chain concerns, now that China and Southeast Asia had begun to return to production. Only 39% said they were reassessing their supply chains “to improve…resistance to future disruption”; 43% said they were not, and 18% were still unsure.
PwC also asked finance executives about how and where the pandemic and its economic impact would be reflected in public disclosures. Only 6% were not anticipating any discussion of COVID-19 in their external reporting. For the remainder, 50% expected to include a discussion in risk factors, 47% in the financial statements and notes, 46% in MD&A (results of operations), 37% in earnings releases and 32% in MD&A (liquidity).
But apparently, CFOs—or at least the ones responding to the surveys—are an optimistic bunch, with 46% in the CFO survey expecting a “V-shaped” recovery (meaning a significant bounce back in the third quarter of 2020), and 42% expecting a slower “U-shaped” recovery extending into 2021. According to the survey, few expected an “L-shaped” recovery: only “10% expected a sustained period of recession, with economic activity not picking up until 2022.” Similarly, PwC reported that 61% expected to be able to bring their businesses back to normal within three months; note, however, that the predicate to the question was “if COVID-19 were to end today,” making the question rather fanciful. Another 22% posited three to six months.