Going concern is a term that describes when a company can continue operating without any threat of insolvency procedures. The business can, therefore, trade and ensure all staff can remain employed. The opposite, however, is a company facing insolvency. Establishing whether your company can operate as a ‘going concern’ is critical, as failure to do so can result in severe consequences. Business Rescue Experts – a leading insolvency practitioner firm in the UK – are sharing what is involved in the assumption.
What does going concern mean?
As mentioned above, going concern allows a company to continue operating. To do so, you must prepare your financial statements to ensure you are not facing any signs of insolvency or serious cash flow issues. With going concern, it is assumed that your business does not need to liquidate any assets. Therefore, it is up to the company directors and or owners to demonstrate this through the financial records. However, be aware that misleading statements can prove hugely detrimental to the future of your company and even your time as director.
There are three aspects to the going concern assumption: assessing going concern, the review and the disclosures.
The assessment is the integral part of the procedure. It is up to you, as a company director, to extensively assess that your company can operate as a going concern, through detailing half-yearly and annual financial statements. If you do intend to liquidate assets or your company liabilities exceed the assets, this is not an appropriate assumption.
When intending to achieve the assumption, companies that are financially ‘sound’ with very few cash flow issues are, likely, to find the procedure much easier. Your best solution is to ensure you produce realistic and achievable budgets and sales forecasts for each year, making sure to always stay ahead of any changes in your financial situation.
Smaller businesses must provide budgets and forecasts, as well as consider the terms of their borrowing arrangements and any other loans that could affect the going concern assumption.
Directors of larger companies must provide a little more before their report, and offer detailed data on products, markets, cash flow timings, contingent liabilities and risk management.
As mentioned above, a report is required to ensure your company meets the obligations to be deemed as a going concern. Larger companies will see an auditor gather evidence and assess their financial situations, supporting or rebuking the assumption. The auditor will outline any uncertainty regarding the business, or add emphasis on their support and report all financial statements have been disclosed.
Issues that may cast doubt on the auditor’s support include the likes of payment losses, loan defaults, denial of trade and credit from suppliers and any negative trends. Legal action against your company is also a red flag.
Smaller companies will find the report a little more straightforward. If your small company is not subject to an auditor’s report, an accountant will look over the statements to ensure they are accurate. The assumption will need to be reassessed, however, if there are negative cash flows and forecasts, an insolvent balance sheet, historical evidence of not meeting payment deadlines and a loss of suppliers and contracts.
The consequences for misleading statements can prove catastrophic for your business. Ultimately, your company can be placed into liquidation if the liabilities exceed the assets. BHS is one such famous example that is, currently, under investigation due to the ‘incomplete, inaccurate and misleading statements’ regarding the retailers ability to keep going. The assumption was applied before the business eventually sold for £1.
It’s important to seek advice at the earliest possible opportunity – particularly to fight off the threat of company insolvency.