Is Your Company A Going Concern Outfit?
As an accountant, one of the basic fundamental convention we alway adhere to is the going concern concept. How then can we see tell-tales of your company not as a going concern outfit?
Some indications and tell-tales are:
- loan repayments are falling due in the near future and refinancing facilities are not immediately available
- high or increasing debt-to-equity ratios exist ( high gearing)
- in the income statement, you notice that most of your profits are eaten up by bank borrowings
- your short term and long term borrowings are structured properly- the company’s projects are mainly on long term but the financing shown in the balance sheet are on very short term basis
- company’s business is heavily depending on trade creditors and bank overdrafts
- there is the inability to take advantage of discounts, the time taken to pay creditors is increasing and suppliers either are imposing cash term/very short term basis or even threaten to sue for the old debts
- insufficient stock as a result of inability to buy raw materials
- profitability trend is either on a downtrend or deteriorating drastically
- normal capex is financed by leasing and other short term financing
- company has a net deficiency of current assets or its ratio of current assets to current liabilities is declining
- the company is very near to its present borrowing limits with no signs of a reduction in requirements
- collection rate from debtors is slowing down
- rapid development of business with sign of overtrading
- substantial investments in products that still take time to generate the necessary revenue & liquidity
- too many yet to succeed joint ventures and unsuccessful R&D on new products
- overdependent on a limited number of products, customers or suppliers
- evidence of major reductions or cancellations of capital projects
- heavility dependence on an overseas holding company for finance or trade
- in companies involve in construction business, most of their projects are at tail-end with only the retention monies reflected in the balance sheet and with no sign of any projects coming in.
Next how about churning out ratios using the Altman’s bankruptcy ratio to see for yourself whether insolvency/bankruptcy is on the way.
[ refer audit qualification]
- Financial Ratio on Assessing The Liquidity Of A Company
- Financial Ratios on Assessing The LEVERAGE or GEARING Of A Company
- Ratio Analysis Of A Company
- Financial Ratios On The Assessing Of The Profitability Of A Company
- Financial Ratios on Assessing The MARKET VALUE Of A Company
July 20, 2007
Tags: Going concern
Posted in: Corp. Restructuring
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