What does going concern mean? – Our guide for finance professionals

For larger companies within the UK, part of audit requirements is to produce a going concern forecast for 12 months from the date of signing the accounts. This is mainly to demonstrate that the business is able to continue to trade for the foreseeable future. Companies must take going concern forecasts seriously as part of their annual audit requirements.

On the one hand, a going concern review is the company’s chance to show the strength of the business and that it will be able to operate and even thrive over the next 12 months.  Conversely it can expose otherwise undetected weaknesses within the business that can leave shareholders and other stakeholders no longer having faith in the future of the company. The consequences of this can be serious, including pulling out of investment and crucial supply chains removing support.

So, what is it?

So, what does going concern mean? ISA 570, also referred to as the Going Concern Standard, plays a crucial role in assisting auditors in identifying and reporting on potential issues or risks related to the organisation’s ability to continue operating as a going concern. As part of the evidence for this, the company must produce an integrated three way forecast for the 12 months following the signing off of the audited accounts. Another going concern definition would be a thorough and diligent assessment of the organisation’s ability to sustain its operations, considering reasonable assumptions.

Let’s delve into what it includes: –

– An assessment of future financial performance

Assessing the future financial performance of an organisation requires careful preparation and thought. Financial performance is often measured in terms of profits and losses made in the previous year and this is the basis for future forecasting. In the past, a company may have only needed a profit forecast or a cashflow forecast. However, in today’s business landscape, it is highly likely that both forecasts plus a balance sheet will be necessary. By utilising software that integrates all three elements, namely, profit and loss, cashflow, and balance sheet data, a comprehensive and thorough forecast of a company’s financial outlook can be achieved.

– An evaluation of the organisation’s cash flow and liquidity positions

An evaluation of an organisation’s cash flow and liquidity position is essential for businesses to stay afloat. Simply having cash on hand is not always enough, as it’s important to consider liquidity, which refers to a company’s ability to meet its financial obligations promptly. Too many non – liquid assets can significantly impact a company’s ability to maintain its operations in the long run. Companies may also disclose that suppliers have started to ask for prepayments for goods or services. The company may also have contractual obligations (e.g., often older longer-term agreements with customers or suppliers) that have become unprofitable. In these instances, a forecast can help analyse an organisation’s cash and liquidity positions, giving stakeholders a clear understanding of the financial health of the business. In the end, monitoring cash flow and liquidity will ensure an organisation is financially stable, which is crucial when making important financial decisions that can impact the future of the business and its stakeholders and employees.

– An assessment of the organisation’s ability to pay its debts on time

When assessing an organisation’s financial health, an important factor to consider is its ability to pay debts on time. This is another example of where a going concern report comes in, which examines the potential risks associated with a company’s solvency. The report evaluates the organisation’s ability to pay debts over a period of time, ensuring that appropriate audit evidence is used to form an accurate assessment. If for example the company has defaulted on a loan or if they have been chased for late payment of invoices, these are strong indicators for the auditor.  With this information, auditors can determine whether the organisation has demonstrated it has the necessary resources to continue operations in the future. Understanding  the level of risk associated with the  ability to pay debts on time is crucial for investors, creditors, and stakeholders who rely on the company’s financial stability as outlined in a going concern forecast.

– An evaluation of the organisation’s future plans to address risks and uncertainties

As businesses navigate the complexities of today’s global economic landscape, uncertainties loom large. In order to thrive in the foreseeable future, organisations must craft robust business plans to address these uncertainties head-on. Plans may encompass everything from sales strategy to import and export strategies as well as robust plans for any future litigation that could disrupt the company. Organisations must also proactively anticipate supply chain disruptions, including shortages of essential raw materials or labour, and formulate measures to mitigate these risks. Taking a comprehensive approach to planning for uncertainties can help organisations not only weather times of instability – but also emerge as agile, sustainable players in an ever-shifting market.

 Support preparing a going concern forecast

Going concern forecasts as part of an audit come at a very busy time for finance professionals. You’ve just gone through the audit and now a comprehensive, integrated, three-way forecast needs to be produced. Being able to accurately assess a company’s financial situation and determine if it is a going concern can mean the difference between success and failure in the business world, and so the pressure is on. As such, finance managers and directors alike need to stay on top of this task so that they are ready when audit time comes around. There are a number of top tips available to help prepare for the challenges ahead in our recent blog.  Clearview can also speed up the process of preparing an integrated financial forecast with easy-to-use software.

Conclusion

For finance professionals, understanding what going concern means in business is crucial, and support in preparation is key. This is where the Clearview forecasting tool comes in. With its user-friendly interface, this tool can assist finance professionals by creating an integrated financial forecast that helps demonstrate going concern obligations. Instead of relying on guesswork, Clearview provides a clear, accurate picture of the company’s financial position. This enables finance professionals to make informed decisions and identify potential cashflow problems proactively. With the ability to forecast ahead, finance professionals can take action to ensure the company’s financial sustainability is planned in. Take control of your going concern forecast and embrace the chance to demonstrate the strength and viability of your business.

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