CFOs, get ready for ‘substantially reduced profitability’

We hate to be the bearers of bad news—so actually, we won’t be. We’ll let the analysts at Gartner do the dirty work.

“By 2027,” they said in a news release, “weak demand and rising costs will shrink earnings before interest, taxes, depreciation, and amortization (EBITDA) margins by more than 30% relative to 2022.”

To be even more direct, as they were with clients in a December report, “CFOs will have to grapple with substantially reduced profitability” in 2024, 2025 and 2026.

Yeesh. Glad we’re not the ones telling you this—especially because there’s more. “Most companies will be unable to deliver the profitable outcomes investors have come to expect across much of the last decade,” the consulting firm wrote, “as the convergence of low rates, suppressed wages, and steady economic growth that enabled those results no longer exists.”

In the place of cheap debt, cheap workers, and solid growth, Gartner said CFOs should expect labor costs to grow more than twice as fast as GDP in advanced economies, and tech costs to grow four times as fast.

The analysts also predict that consumers will be spending less after taking on too much debt, and noted, in the report for clients in December, that the effects of climate change will tack 10% onto enterprise structural costs by 2028.

What to do, what to do. “CFOs must intervene early” to limit how much these costs eat into EBITDA margins, Randeep Rathindran, distinguished VP of research at Gartner Finance, said in the press release. The traditional approach to cost cutting isn’t going to cut it, though, he said, because investing in new tech and the skills to use it “are necessary for transforming corporate functions.” Instead, Gartner recommends “taking a broader view of cost optimization” that includes avoiding and shifting costs.

The tough medicine continues: Loans and bonds will get costlier as some banks and investors pull back out of fear they won’t be paid, the consultants predicted. They advise CFOs to check out less-common sources of financing. Public-private partnerships, anyone?

For all the creative thinking you’ll need, surviving the EBITDA erosion will also take some courage. Now, Gartner didn’t use the word “courage,” but it did say “CFOs should recalibrate stakeholder expectations.”

If there’s a better word for what you’ll need to tell your CEO, board, and investors that they’ll be making less money, we’re not sure what it is.