Study Finds Uncertainty Costs Middle-Market Firms 4.4% of Revenue on Average

• 47% of CFOs from smaller middle-market firms face considerable levels of uncertainty, and they are more than twice as likely to face this as the largest middle-market firms.
• 35% of middle-market firms say uncertainty led to missed opportunities last year.
• CFOs that identify excess inventory costs as the biggest source of uncertainty report that more than 6% of annual revenue — or $33 million — was lost.

The larger the firm, the greater the sense of certainty. That is what CFOs from smaller U.S. firms with revenues between $100 million and $250 million suggest. These CFOs grapple with greater levels of uncertainty than their larger counterparts with revenues between $750 million and $1 billion. With eyes on the bottom line, CFOs at larger firms feel they have the resources needed to meet organizational growth and innovation goals. Fifty-seven percent of the largest middle-market companies say they operate at high levels of certainty.

This difference is not just theoretical but has tangible financial implications. CFOs credit an average total cost of $21 million to uncertainty in the last year alone. For CFOs with $1 billion in revenue, that $21 million represents a roughly 2% marginal loss, an amount that could be insubstantial for some or deadly for firms with tight profit margins.

For a CFO overseeing significantly less revenue, that $21 million will represent an even worse loss. These costs underscore uncertainty’s acute impact on everyday operations and strategic decision-making across what many consider the “real” economy.

In this environment, customer demand behaviors rank alongside supply chain integrity as leading sources of uncertainty, affecting 33% and 32% of surveyed CFOs, respectively. These challenges come with concerns about competitive positioning, painting a picture of a sector constantly adapting to evolving market dynamics.

• What’s at Stake
• Customer Demand Challenges Top CFO Concerns
• Uncertainty Clouds Middle-Market Outlook
• Uncertainty Takes a Financial Toll
• Data Analytics Driving Better Forecasts
• Conclusion
• Methodology

What’s at Stake

The concerns of middle-market CFOs represent a crucial barometer of the current business climate in the U.S., offering a look into how companies strategize to stay afloat and thrive despite the steady fog of uncertainty.

This year, perhaps the most significant hurdle for middle-market CFOs is a nagging sense of economic uncertainty — deeply felt but not evenly distributed across revenue areas. PYMNTS Intelligence’s data paints a stark picture: 47% of CFOs from smaller firms — those with revenues of $100 million to $250 million — face considerable uncertainty. This share is more than twice the 21% faced by CFOs operating in the largest income bracket of $750 million to $1 billion.

These are just some of the findings in “The 2024 Certainty Project: Measuring the Cost of Uncertainty on Middle-Market Businesses,” the first release of the PYMNTS Intelligence 2024 Certainty Project. This monthly project rotates through CFOs, heads of payment and heads of operation to monitor trends and sentiment across areas of operation for U.S. firms with revenues between $100 million and $1 billion. This edition looks at the core sources of uncertainty and some of the solutions CFOs have used to address them. The report draws on results from a survey of 60 CFOs at companies with annual revenues between $100 million and $1 billion in 2023. PYMNTS Intelligence conducted this survey from Feb. 12 to Feb. 21.

The Economics of Small Business

Smaller firms often benefit from flexibility and agility, which allow them to adapt quickly to market changes. However, their heightened vulnerability to supply chain disruptions and demand fluctuations counterbalances this advantage. Their relatively lower bargaining power with suppliers and in contract negotiations can lead to higher operational costs and thinner profit margins, challenging their competitive stance. Furthermore, smaller companies usually have a limited range of products or services. These firms often rely more heavily on a single product line or market. This lack of diversification places them at greater risk from shifts in consumer preferences, economics and industry-specific trends, making it harder to weather market volatilities.¹

Customer Demand Challenges Top CFO Concerns

The average cost of uncertainty for middle-market CFOs is 4.4% of revenue, or $21M.

In the past 12 months, these companies have felt the financial strain of economic uncertainty. These CFOs report that this has cost their organizations an average of $21 million. However, CFOs credit greater costs to specific types of uncertainty. The most significant factor behind this cost is the unpredictability of customer demand. This includes factors such as contract and inventory management, product availability and new business acquisition. Middle-market firms citing these factors as their biggest sources of uncertainty report a loss of $41 million on average — 7% of revenue. Firms whose biggest source of uncertainty was supply chain challenges lost an average of $11 million, or 3.8% of revenue.

PYMNTS Intelligence also tracked the fallout of uncertainty — and its residual costs. Middle-market firms that cited unpredictability’s most significant impact as experiencing missed opportunities saw losses of $17 million. Those citing reduced profit margins as the end result reported losses of $33 million, on average. Those struggling mainly with excess inventory costs reported a 4.8% loss of annual revenue, a $17 million hit.

Uncertainty Clouds Middle-Market Outlook

One-third of middle-market companies in the U.S. say they operate in a highly uncertain environment.

Middle-market companies continue to navigate substantial unpredictability, which impacts their decision-making and planning. More than two-thirds of CFOs say they operate with a low to middle sense of certainty. Key areas affected by this include customer demand and inventory management, supply chain integrity and competitive positioning.

Notably, just less than one-third of CFOs cited speed to market as a significant factor driving uncertainty in competitive positioning. This suggests that even in an uncertain business environment, business leaders must understand their market and their customers and have systems in place to predict demand with less error.

Uncertainty Takes a Financial Toll

A lack of timely data causes uncertainty. It is also why twice as many CFOs use AI and data analytics over process automation to reduce it.

Middle-market CFOs have tried numerous strategies to wade through the current economy. In particular, three-quarters relied on data collection and analytics to guide their decision-making and reduce unpredictability in the last year. This approach is significantly more common than process automation, for example, with 75% of middle-market CFOs using analytics but just 44% turning to process automation. In particular, 63% of firms have turned to using analytics to predict customer demand behavior. To compare, 72% have used trend forecasting to reduce uncertainty in their competitive position, such as speed to market.

In addition, CFOs are using various strategies to bolster predictability in accounts receivable (AR). These strategies include hiring personnel, training personnel, upgrading software and using process automation, with 25% of CFOs citing each as an action taken in the month before the survey. Overall, 55% of CFOs report hiring employees with specific skill sets to address challenges and reduce uncertainty in business performance.

These efforts reflect a broader idea that managing uncertainty is not just a process challenge but hinges on the availability and effective use of data. By using analytics for forecasting urgent trends, CFOs at these middle-market firms report better predictability in their operations.

Data Analytics Driving Better Forecasts

CFOs that used analytics for forecasting see better decision-making predictability 90% of the time.

Middle-market companies have taken a clear turn to analytics for forecasting and software upgrades. This shift has improved predictability, seeing positive results in 94% of cases. While using technology has been beneficial, relying solely on data collection has not been a foolproof strategy. Collecting data improved predictability in 67% of instances, showing that data alone is necessary, but not enough to navigate uncertainty successfully. This brings out a challenge:

All the same, the pursuit of quality advice — in other words, sound anecdata — also presents a mixed bag to CFOs. Securing informal insight from professional networks, a commonly used strategy, helped handle uncertainty roughly 60% of the time. Still, in several instances, the situation was worse for some CFOs. This shows CFOs’ must assess and apply advice to suit their specific situations, especially in times of uncertainty.

Looking ahead, roughly 52% of middle-market CFOs are hopeful about improved certainty levels in the next year. However, firms with an annual revenue of between $250 million and $400 million remain uneasy. A significant portion of these firms expect increased uncertainty, likely due to the higher costs of uncertainty for this revenue bracket. Middle-market CFOs in this lower revenue bracket see the highest costs of uncertainty, at 7.1% of their revenue.

Conclusion

The “2024 Certainty Project” sheds light on the business impact of economic uncertainty within the middle market. Though the overall picture is complex, a clear trend emerges among smaller middle-market companies that feel the pinch most acutely. CFOs in this segment report higher levels of unpredictability than larger companies that experience greater relative stability. This gap suggests an uneven investment in data and analytic tools across the middle market, leaving some firms unable to tackle these challenges.

Uncertainty can lead to significant losses. The average middle-market company lost $21 million in the past year, according to their CFOs. However, some unpredictable costs cause more damage. This includes fluctuating customer demand, which is linked to an average cost of $41 million. Challenges can also extend to supply chains, competition and speed to market. In response, CFOs are turning to data analytics and software upgrades to weather this successfully. While these strategies show promise, relying on informal networks has mixed results, showing the need for careful planning and execution.

Methodology

“The 2024 Certainty Project: Measuring the Cost of Uncertainty on Middle-Market Businesses,” is the first edition of the PYMNTS Intelligence Certainty Project. This monthly project monitors trends and sentiment across operations in larger middle-market firms and small enterprise companies with revenues between $100 million and $1 billion. Each month rotates through CFOs, heads of payment and heads of operation to best capture the sources and costs of unpredictability and the strategies the C-suite uses to help weather complex and dynamic business environments.

In this issue, we examine core sources of uncertainty and some of the solutions CFOs have used to address it. The report draws on results from a survey of 60 CFOs of companies with annual revenues between $100 million and $1 billion in 2023. Ninety-seven percent of the businesses have been in operation for 10 years or more, with just 3% in operation between five and 10 years. The survey was taken from Feb. 12 to Feb. 21.

^{1. [Anna Cororaton & Sagiri Kitao & Sergiu Laiu & Ayşegül Şahin, 2011. “Why small businesses were hit harder by the recent recession,” Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17 (July).”>↩}