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EY: Is your capital allocation strategy a long-term plan or a short-term fix?

The pandemic shows that CFOs need to remain agile as they focus on long-term value.

In brief

  • More than half of CFOs say they need to completely rethink their capital allocation strategy, a need intensified by the pandemic.
  • Four out of five CFOs say their capital allocation process needs to be improved. Access to data is seen as the top challenge.
  • CFOs are increasingly investing in digital and R&D to address the post-pandemic future.

How EY can help

Capital allocation services

Companies need a capital allocation strategy that is well thought through and aligned to their overall business objectives.

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Chief financial officers are recovering from a once-in-a-generation shock to their capital allocation strategies. Even as they deal now with the upheaval induced by the COVID-19 pandemic, they must make plans to improve long-term business performance. This means developing a capital allocation process that is fit for a future that may be radically transformed in a few short years by the impact of digital technologies, a changing workplace and evolving business models.

How can CFOs develop the right capital allocation strategy and process while investment decisions are being scrutinized by investors and employees, regulators and society at large?

To better understand how businesses are addressing market changes — and how they should adapt their capital allocation strategies going forward — EY teams surveyed 1,050 CFOs around the world and across industries in the first weeks of 2021. Findings include:

  • Over half (56%) of CFOs say their capital allocation strategy needs to be completely rethought.
  • Four in five CFOs say their capital allocation process needs to be improved.
  • About two-thirds were unable to fund all planned projects in 2020, which could have consequences going forward, especially as the pace of transformation quickens.
  • Only 47% say their capital allocation process effectively meets total shareholder return (TSR) goals.

The lack of confidence in their capital allocation strategy, combined with the shortage of capital to fund all projects, underscores the need for companies to refocus their portfolios on their core business, carefully choose which initiatives to fund and address potentially long-term changes to their market.

Companies’ next steps will vary depending on the pandemic’s impact. Some industries such as transportation and restaurants have seen their entire business model upended. They urgently need to improve elements of their capital allocation process. Others, such as technology and life sciences, have seen increased demand and a financial windfall. Still, they should not let that mask long-term changes that need to be made lest they fall behind in the future.

CFOs and their companies must:

Authors

Loren Garruto

EY Global and Americas Corporate Finance Leader

Evan Sussholz

EY US Strategy and Transactions Partner

Ben Hoban

EY US Strategy and Transactions Senior Manager

Andre Toh

EY Asean Valuation, Modeling & Economics Leader

Adrian Nicholls

EY Global and UK&I Valuation, Modeling & Economics Leader

Sebastian Schmidt

EY Germany, Switzerland, Austria (GSA), and EMEIA Valuation, Modeling and Economics (VME) Leader

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