Gartner says weak demand and rising costs will shrink earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins by more than 30% by 2027 compared to 2022.
This is among the issues chief financial officers will be facing in the coming months as the management consulting company forecasts that organisations will find it tougher to attain growth through 2026 due to elevated levels of consumer debt and weaker-than-expected corporate cash flow, dampening demand by reducing both discretionary and nondiscretionary spending.
“Ongoing uncertainty and instability will expose organisations to sudden cost surges in the coming years,” says Randeep Rathindran, distinguished vice president of research in the Gartner Finance practice.
He adds that CFOs must intervene early to mitigate margin squeezes and confront spiralling expenses driven by the labour market, climate change, and digital transformation.
Most organisations will be unable to deliver the profitable outcomes investors have come to expect across much of the last decade, as the convergence of low rates, suppressed wages, and steady economic growth that enabled those results no longer exists.
Many organisations will then seek out new strategies for hitting earnings targets, Gartner says.
Further, organisations are expected to struggle to manage the gap between reality and perception on cost savings from continued investments in automation.
Without true end-to-end process automation, any time savings from automation will be fractional. This includes displacing one-third of a full-time employee but not the whole one.
Traditional sources of capital funding such as bank lending or bond issues will become less viable as lenders and investors put greater scrutiny on near-term payback risk. Small or midsize margin-tight companies may struggle to cover interest expenses and become “zombie” companies confronting the prospect of bankruptcy or acquisition.
“Reliable strategies that CFOs have employed to mitigate similar market conditions in the past, such as selling, general and administrative expenses (SG&A) cost reductions, are no longer as feasible or effective given that expensive investments in digital technology and skills are necessary for transforming corporate functions,” added Rathindran.
The needed response
In response to market conditions that will continue to shrink EBITDA margins for the foreseeable future, Gartner says CFOs should recalibrate stakeholder expectations regarding financial models.
Conducting a stress test of financial assumptions around run rates for revenue, volumes, and costs can help identify potential gaps between reality and perception.
CFOs can also look into right-sizing selling, general, and administrative costs by taking a broader view of cost optimisation that is not exclusive to just cost-cutting, but also cost-avoidance, cost-shifting, and value optimization to find savings while protecting critical organizational capabilities and transformation investments.
“CFOs can help their organisations overcome reliance on high-interest debt by broadening their view of funding sources beyond bank lending and corporate bonds,” said Rathindran. “Financial leadership should explore secondary equity issues, venture capital, and nondilutive financing options such as public-private consortia.”
