IAFEI News: CFOs worldwide stockpile cash

By John Graham, D Richard Mead Jr. Family Professor of Finance. The Fuqua School of Business, Duke University, and Philippe Dupuy, Associate Professor, Accounting, Law and Finance, Grenoble Ecole de Management

From International Association of Financial Executives Institutes (IAFEI) March 2020 Quarterly Issue

More than half of US businesses expect a recession to occur in 2020

Firms will hold cash and cut costs to prepare.

The CFO survey has been conducted for 95 consecutive quarters and spans the globe making it the world’s longest-running and most comprehensive research on senior finance executives. Results are for the US unless stated otherwise.

More than half of US businesses expect a recession to occur in 2020, coinciding with the timing of the presidential election according to fourth-quarter results from the Duke University-CFO Global Business Outlook.

2020 recession

More than half (52%) of US CFOs believe the US will be in an economic recession by the end of 2020 and 76% predict a recession by mid-2021. Business leaders continue to expect and economic slowdown in the US before or concurrent with the presidential election. We would expect uncertainty about the election itself to cause firms to slow expansion in the summer and fall of 2020. Seventy-nine percent of CFOs in Asia believe their countries will be in recession by the fourth quarter of 2020 as do the majority of CFO’s in Africa (77%), Canada (67%) and Latin America (55%). 49% of CFOs in Europe expect a recession by the end of 2020. 

Cutting costs and stockpiling cash

56% of US companies indicate they are taking steps to prepare for a recession. Among these firms, 59% are strengthening their balance sheets, 58% are reducing costs, 49% are increasing liquidity and 31% are scaling back or delaying investment. During the last recession, CFO’s could genuinely say that their lack of planning was a result of a sharp downturn that was a surprise to most. However, it would be foolhardy to claim that the recession in 2020 or 2021 was a surprise. Although recessions are not controlled by CFO’s the impact on their firm is to a large degree managed by the CFO. This time around CFO’s will be judged by their preparations.

Hoarding cash and reducing debt are the most obvious tactics to dull the blow of a recession. 54% of US firms indicate they are unlikely to spend their cash holdings during 2020 to preserve liquidity and spending power should a recession take hold and tighten lending markets.

Most pressing concerns

Difficulty hiring and retaining qualified employees is the top concern amongst us companies with nearly half of CFO’s indicating that hiring is one of their most pressing concerns. You cannot make uncertainty is the second-highest concern followed by data security worries and the high cost of employee benefits.

Economic uncertainty is also a major concern among CFO’s around the globe. Nearly 70% of Latin American CFO’s list uncertainty as a top concern, as do 58% in Asia and 51% in Europe. Many executives in developing countries are troubled by currency risk and government policies, while executives in Europe are concerned about regulation.

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