Can we be certain our business will survive the next 12 months? Monday, December 08, 2008
Company Directors and Auditors are having to think long and hard about the "going concern" opinions they are required to express in the annual accounts. Most businesses are facing an uncertain time, especially around their banking facilities and funding, as well on-going profitability concerns.
Yet they are equally worried that any reservations or qualifications they may make to protect themselves regarding the future in the context of going concern matters may be self-fulfilling and panic investors. For instance, highlighting that the continuity of the business depends upon successfully renewing banking lines 6 months ahead may lead to jitters given that the rollover of such facilities is no longer as certain as it once was. Likewise, being dependent on the survival of both major customers and suppliers may have once been taken for granted - no longer.
Funnily enough, I once remember during my accountancy training being diverted for a week from my normal sector [capital markets, banks and building societies] to a building/construction materials business. I was astonished how no consolidated information existed within this large group about its' "counterparty" exposure to large building firms such as Wimpey or McAlpines. Management simply had no idea what the financial impact would be of a major building customer going out of business would be. Yet it was evident that my enquiries were received with bemusement, since this wasn't normal practice anywhere outside financial services.
Winning a large contract from a large customer is now a double edged sword - you are grateful for the business but concerned about the cashflow impact given that large customers typically demand generous payment terms, as well as worried about the financial viability of the same customer. Slow payment has always been a source of finance for companies, but the squeeze by banks makes it increasingly important. Sadly the companies under the "cosh" are those that can probably least weather it.
Likewise, the just in time supply chain upon which you rely now resembles a fragile chain with links buffeted by strong financial winds. Somewhere down that line a key component manufacturer could disappear or simply fail to secure the necessary letters of credit to oil the wheels of trade.
In the current climate, providing an opinion about your future business state is the question you will be increasingly asked - do you have an answer based on substance that you can confidently offer?
Labels: Going concern