As we step into 2023, CFOs need to be mindful of the top five known unknown risks that can catch an organization off guard.
Important risks in 2023 catch us off guard, either because they are unheard of or go unnoticed. CFOs need to monitor and manage these risks, even though they are usually “known unknowns.” The top five risks for 2023, listed in decreasing order of general awareness, are discussed below.
5.The Macroeconomic Environment
Realistic recession expectations? inflating efforts? CFOs handle both. After June 2022’s 9.1% year-over-year CPI, finance executives were more cost sensitive. They utilized scalpels to help offset legal and raw material price rises.
However, the Federal Reserve’s tightening of monetary policy to fight inflation gives CFOs another reason to slash expenses. Aggressive Fed funds rate increases have increased 2023 recession fears. Over the last year, successful price raisers may see sales growth slow down. Last Monday, Procter & Gamble reported that sales volume fell by 6% in the fourth quarter, twice as much as in the third quarter.
Dustin Renn, CFO of purchasing platform Teampay, blames the bleak 2023 estimate on uncertainties about how long and high the Fed will need to boost rates to stabilize prices.
Executive and World Bank surveys expect reduced economic growth. The World Bank predicted 0.5% U.S. economic growth this year and 1.7% global growth in 2023. In 2023, S&P forecast a 0.1% GDP decline and a recession in the US. In late 2022, American finance executives predicted 0.7% real GDP growth and 31% negative growth after inflation in the Richmond Fed/Duke CFO survey.
Companies are wondering if they prepared enough for bad times. Lacework CFO Andrew Casey stated. In this uncertain environment, CFOs risk “readjusting businesses that have been primarily focused on growth to rein in spending, rethink business plans, and drive toward profitability.” Finance leaders must plan accurately and manage cash flow routinely.
4.The High Cost of Labor and Low Employee Engagement
It kills. Mercer’s U.S. Compensation Planning Survey indicated management allocated 3.8% for merit increases and 4.2% for promotions and cost-of-living adjustments this year. CEOs and managers fret about burnout, while CFOs decrease costs.
Nearly one-third of 256 Grant Thornton CFO poll respondents stated they might lay off staff in six months. 40% wanted cheaper labor. Amazon, Microsoft, DirectTV, Salesforce, Vimeo, and Google announced big 2023 layoffs.
In an email, Prophix Software CEO Alok Ajmera said cost-cutting and “the immediate reality faced by employees, who see rising costs of goods and a still-bustling job market as justifications for salary increases” are pressing staff. “Over the next six to nine months, organizations will fight to keep their cash as the job market and employees’ expectations level-set.”
PwC’s U.S. trust solutions co-chair Wes Bricker believes the tight labor market will make finance chiefs reconsider reducing sought-after professionals. Bricker’s PwC co-chair Kathryn Kaminsky said firms are “more selective in seeking out those with a unique set of skills” owing to cost pressure.
The Miles Group founder and CEO Stephen Miles said IT companies may “move from a potential-driven world of hiring as many people as possible to a performance-driven world” and hire fewer employees. That planet boasts “massive AI advancements” and “higher talent density.”
The epidemic “erodes the employee experience,” according to the Conference Board’s 2023 outlook.
PwC’s Bricker says C-suite executives worry about stimulating employees during a slump. “CFOs, CEOs, and other leaders must demonstrate that their company is progressing beyond a dip in the economy and creating value.”
Workplace contact may reduce widespread disengagement. “CEOs realize that over the pure [work-from-home] years little or no performance management has occurred, and even less investment and development of people,” said Miles, whose firm specializes in CEO successions and senior transfers. End employee flexibility.
3.Increasing Interest Rates
In 2023, banks, private creditors, and bond issuers will boost fees. Credit and refinancing rise. Without a recession, this may slow business growth. Overleveraged corporations can fail. In a November presentation, famed short-seller Jim Chanos warned that business methods that worked well when the Fed funds rate was zero may not work as well when it is close to 5%.
BofA Securities found 800 high-yield and investment-grade companies “shifting to de-risk their balance sheet through capital preservation as they brace for potential margin pressure and recession” in late November.
Murphy Oil reduced its $1.8 billion debt by $646 million last year using free cash flow. be investment-grade. Deere, an investment-grade company, may need to refinance its debt in three years at a higher rate.
Large firms rarely default. BofA Securities expects high-yield issuer default rates to rise to 6% in a recession from 15% during the financial crisis. Inflation and Fed rate hikes may boost bankruptcy and restructuring.
In 2023, rising interest rates and job losses would hurt credit markets, according to International Association of Credit Portfolio Managers executive director Som-lok Leung. Leung thinks these loans are safeguarded from increased rates. Low interest rates allow many U.S. corporations to borrow.
American banks are lending less to small firms, according to the Kansas City Federal Reserve Bank. Third-quarter 2022 small firm commercial and industrial loan balances dropped 22.1%. Interest soared. New variable-rate small business term loan median rates rose 112 basis points to 6.25% and 128 basis points to 6.8%.
Businesses won’t have cash to reduce leverage. In the coming year, highly leveraged companies with huge debt must manage covenants to avoid danger, according to Prophix CEO Ajmera. Businesses who violate covenants ask banks to confiscate their money.
A CFO absorbed in a financial performance dashboard or budget spreadsheet may find world politics esoteric, but this year’s issues demand attention. Businesses struggled after Russia invaded Ukraine. Ball sold Russian operations for 8% of operational profits last year. Russia sale will affect EMEA profitability due to UK and Czech Republic plant building.
Business geopolitical threats will rise. The World Economic Forum’s 2023 Global Risk Report predicts “increasing clashes between global powers and state intervention in markets over the next two years” due to “geopolitical fragmentation.”
The WEF says economic measures “will be used offensively to stifle the rise of others, as well as defensively to build self-sufficiency and sovereignty from rival powers.” US-China tensions threaten. “Strategic competition between the U.S. and China is driving global fragmentation as both focus on boosting self-reliance, reducing vulnerabilities, and decoupling their tech sectors,” says BlackRock Investment Institute’s Geopolitical Risk Indicator. Unprecedented U.S. semiconductor export restrictions to China will accelerate decoupling.
Stephen Miles of the Miles Group believes supply chain constraints and “China entering into a new phase of aggressive posturing on the global stage has sent a flare-up for many global CEOs [and CFOs] who have people and operations in China.” Miles said the COVID-19 epidemic proved firms’ supply chains are “global, low-friction, and single-source for accessible, durable, and multi-source.”
Miles predicts “local and dual source” inflation. Second, Miles says constraining global supply chains will lose a tool that unified people and ended conflicts.
In a world of “good actors” and “bad actors,” Miles feels we are headed for strife.
PwC’s Kaminsky urges CFOs and other executives facing board inquiries regarding geopolitics in 2023 to estimate risks to limit their impact. How might qualitative decision-making frameworks include these risks?
1.Second Crisis, or ‘Risk On Top of Risk’
The situation of being hit by a second, unrelated risk when their firm is already in crisis mode is the last risk CFOs this year should be mindful of. Three authors of risk management textbooks advised CFO readers in 2021 that firms that are already vulnerable due to a protracted crisis can create blind spots. According to the authors of “COVID-19: The Risk Management Part Is Unfinished,” a second unexpected crisis could be a “tipping point” with “disproportionately negative impacts on the organization.”
There are many risks that aren’t included in this list, including employee fraud, cybersecurity breaches, labor disruptions, inflation that won’t go below 2%, the U.S. defaulting on its debt, new burdensome business regulations, the erosion of consumer demand, claims of greenwashing, an abrupt slowdown in customer payments, the switch to clean energy, and a new competitor that undercuts you.
Due to the variety of risks that many businesses will face this year, it is crucial that CFOs and risk management teams develop plans for how the firm will function in the event that one of these risks or others materializes. I questioned the authors, “Will you be able to work through it when something new breaks?”