The going concern memo is a report produced annually by external auditors that provides an assessment of whether an organisation is likely to remain in operation for the foreseeable future. This memo is a critical part of the financial reporting process, and its contents can have a significant impact on the decisions of various stakeholders, including investors, lenders, and regulatory bodies.
Purpose of the Going Concern Memo
The primary purpose of the going concern memo is to assess whether an organisation has the ability to continue operating as a going concern for the foreseeable future, typically the next 12 months. This assessment is based on an evaluation of various factors, including the organisation's financial performance, liquidity, debt obligations, cash flow projections, and other relevant factors. The auditor's assessment is then used to inform the organisation's financial statements and other financial reporting documents.
Content of the Going Concern Memo
The going concern memo typically includes an introduction that outlines the purpose and scope of the memo, as well as a summary of the auditor's findings. The memo also includes a detailed analysis of the organisation's financial position, including a review of its income statement, balance sheet, and cash flow statement. The auditor's analysis will typically include an assessment of the organisation's liquidity, debt obligations, and cash flow projections. The memo may also include any significant events or transactions that could impact the organisation's ability to continue operating as a going concern.
Significance of the Going Concern Memo
The going concern memo is a critical document that is used by various stakeholders to assess the financial health of an organisation. Investors, lenders, and other stakeholders rely on the going concern memo to make informed decisions about whether to invest in an organisation, lend money to it, or continue to do business with it. Regulators also use the going concern memo to monitor the financial health of organisations in their respective industries.
Factors Considered in the Going Concern Assessment
When preparing a going concern memo, external auditors consider various factors that could impact an organisation's ability to continue operating as a going concern. These factors include the organisation's financial performance, liquidity, debt obligations, cash flow projections, and other relevant factors. Auditors may also consider any significant events or transactions that could impact the organisation's ability to continue operating as a going concern, such as a change in ownership or a major lawsuit.
Conclusion
The going concern memo is a critical document that provides stakeholders with a detailed assessment of an organisation's ability to continue operating as a going concern for the foreseeable future. This memo is based on an evaluation of various factors that impact an organisation's financial health, including its financial performance, liquidity, debt obligations, cash flow projections, and other relevant factors. The going concern memo is a valuable tool for investors, lenders, and regulators, as it provides insight into an organisation's financial health and its ability to meet its financial obligations. As such, it is important for business owners and investors to understand the significance of the going concern memo and to pay close attention to its contents when assessing the financial health of an organisation.
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About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative companies in the technology, environmental impact and renewable energy sectors, who are preferably beyond a Series A funding round or equivalent, to help them fulfil their paths to profitability and growth ambitions.
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