In these times, when forecasts and models are directing our lives to an unprecedented extent, never has there been such uncertainty about their accuracy and basic efficacy. This certainly holds true for going concern – often the largest judgement that management has to make when preparing annual financial statements.
The accounting regulator, the Financial Reporting Council (FRC), has placed mounting pressure on the shoulders of auditors to ensure they challenge and interrogate the going concern judgements made by businesses. Therefore, to ensure your assessment of your tech company’s prospects can survive this interrogation, there is some key best practice advice worth considering.
Putting your best foot forward
Presenting credible forecasts, which demonstrate the ability of your tech business to survive a variety of severe but plausible scenarios, is vital. These do not need to include ‘worst-case’ scenarios that are outside the realm of realistic possibility (i.e. implausible) but they do need to address head on the main uncertainties facing the business and explore how it could cope if these took a turn for the worse (i.e. severe).
Importantly, these forecasts should cover a period of at least a year from the projected date of signing the financial statements and should model the impact on your cash and liquidity. On the basis of these forecasts, you can then make your assessment of going concern to present to the auditor. This assessment should set out all the measures taken by the business to safeguard cash, including cost-cutting and accessing CBILS loans for example, and your reasons for confidence in the business’s near future, such as revenue growth, new products and access to new sources of funding.
Money in the bank
Financing is key. If your forecasts rely on overdraft and loan facilities, you will need to know whether these extend for the full year after signing the financial statements or if they require renewing in that time. If renewal is required, you will need to consider what evidence you can provide to the auditor demonstrating that the facilities are highly likely to be renewed (i.e. correspondence with bank on chances of renewal, track record of consistent renewal in the past, etc).
Additionally, if your loan financing has covenants attached, your cashflow forecasts will also need to model compliance with these covenants. If they indicate a covenant will be breached, it would be wise to initiate discussions with your lender to see if a waiver can be obtained well in advance. Although we have seen an increased willingness from banks to waive covenants in these straitened economic times, this cannot be taken for granted.
Does it work?
The technical and commercial feasibility of your product is key, particularly if your business is earlier in its life-cycle and hasn’t yet broken even. Demonstrating the progress you have made in developing the product, i.e. the obstacles you have overcome, as well as interest from customers and distributors is vital, as well as any track record of bringing similar products to market.
Ultimately, updating your business plan to include a comprehensive and well-evidenced going concern assessment is key. Through this, you will give yourself every chance of convincing your auditor and other stakeholders of the going concern status of your tech business.
Written by David Lineen, Director, haysmacintyre