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20 April, 2022 - 21:37 By Tony Quested

Deloitte says CFOs are still investing despite rise in operating costs

Faced with a more uncertain economic climate, a record number of finance leaders – 98 per cent – anticipate operating costs to rise in the year ahead, according to Deloitte’s UK CFO Survey Q1 2022. Almost half of CFOs expect these rises to be significant.

In light of cost increases, there has also been a sharp deterioration in the outlook for corporates’ margins. A majority of CFOs (71 per cent) believe operating margins will fall over the next 12 months compared to 44 per cent in the previous quarter. Despite this, three-quarters expect revenues to rise over the next year.

Capital spending remains a strong priority for 21 per cent of CFOs, even with a more challenging operating environment. Although this has dropped from last quarter’s record high of 37 per cent it remains considerably above the five-year average of 14 per cent.

Conducted between March 16 and 30, the survey captured sentiment amongst the UK’s largest businesses against a backdrop of ‘Plan B’ COVID-19 restrictions easing and after the Russian invasion of Ukraine. The invasion of Ukraine has heightened the level of financial and economic uncertainty facing businesses. Over half of CFOs say that the level of uncertainty facing their business is high or very high.

Geopolitics has risen sharply as the top risk facing CFOs’ businesses. With the exception of the pandemic during Q2 and Q3 2020, the risk rating assigned to geopolitics is higher than any other factor since the question was first asked in 2014. Rising inflation, the prospect of further interest rate rises, and persistent labour shortages, also rank high on the list of CFO concerns. 

Ian Stewart, chief economist at Deloitte, said: “Rising geopolitical risk in the wake of the invasion of Ukraine and alongside high inflation mean that the external challenges faced by business are greater today than at any time in the last eight years. These risks now far eclipse Brexit and the pandemic, which have dominated the list of CFO concerns in recent years. Over the next year, CFOs believe a mix of rising costs and slower growth are set to squeeze margins.

“In spite of this - as finance leaders have become accustomed to navigating a more volatile business environment - they remain focused on capital spending and growing their businesses.”

Over three-quarters of CFOs (78%) expect inflation to exceed 2.5% in two-years’ time – the highest reading on record*. Meanwhile more than half (53%) expect inflation to settle between 2.5% and 3.5% in two-years’ time and a quarter expect it to remain above 3.5%.

CFOs expect interest rates to rise substantially over the next 12 months. On average, they expect the Bank of England’s base rate to be 1.5% in a year’s time, double its present level of 0.75%, but below current financial market expectations.

Just over a third (35%) of finance leaders report that their businesses have faced significant or severe recruitment difficulties in Q1 – a slight improvement from Q4 2021 (46%). CFOs anticipate labour shortages will persist, with around one in four saying these will be significant or severe in a year’s time.

In Q1, more than a quarter of CFOs reported significant or severe levels of supply chain disruption. A modest improvement in conditions is expected, with one in six CFOs anticipating similar levels of disruption in a year’s time.

Paul Schofield, Deloitte Cambridge and South East Practice senior partner said: “How quickly things move! Geopolitical events and the longer term economic outcomes of COVID-19 are having an impact on operating costs and margins. 

“This is something we have definitely seen in the Eastern Region and in recent corporate reporting. Pleasingly, despite predicting further inflation and interest rates rises, we see CFOs continuing to invest – which gives some reason for positivity as we look forward.”

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