Are you curious about what a going concern is and what it means for your business? If so, you’ve come to the right place. In this blog post, Tommy Shek breaks down everything you need to know about the going concern principle and how it impacts your company. So without further ado, let’s jump in!
What is The Going Concern? Tommy Shek Answers
The term going concern is used in accounting to describe a business that is expected to continue operating for the foreseeable future. A going concern is assumed when preparing financial statements unless there is evidence to the contrary. This means that the business’s assets will be used to generate revenue and cover expenses rather than being sold off.
There are a number of factors that can indicate whether a business is a going concern, including its financial stability, ability to meet short-term and long-term obligations, and history of profitable operations. If a company is not expected to continue operating as a going concern, this must be disclosed in the financial statements.
Going concern is an important concept for businesses and their investors, as it provides assurance that the company will be able to meet its financial obligations and continue operating into the future. It is also a key consideration for lenders, as they need to be confident that the borrower will be able to repay the loan.
Conditions for Going Concern
There are a number of ways to assess whether a business is a going concern, including:
– Financial stability: This can be assessed by looking at the company’s financial statements, including the balance sheet, income statement, and cash flow statement. The company should have enough cash on hand to cover short-term obligations, and its long-term debt should be manageable.
– Ability to meet obligations: The company should have enough revenue to cover its expenses, and it should be able to make debt payments on time.
– History of profitable operations: The company should have a track record of profitability, which indicates that it is able to generate enough revenue to cover its expenses.
If a company is not a going concern, this does not necessarily mean that it will go bankrupt. However, it does indicate that there is a risk that the company may not be able to continue operating and may have to shutter its doors. As such, companies that are not going concerns may find it difficult to obtain financing from lenders or investors.
It is important to be aware of the red flags that may indicate that a company is at risk of financial difficulties. Some common warning signs, according to Tommy Shek, include:
– Decreases in sales or revenue
– Operating losses
– Negative cash flow from operations
– High levels of debt
– Difficulty obtaining financing
– Inventory write-downs
– Accounts receivable problems
If you see any of these red flags, it is important to investigate further to determine if the company is in danger of failing. If the company is indeed at risk, it may be wise to take your money out before it’s too late.
Going Concern vs. Liquidation Value
When it comes to businesses, according to Tommy Shek, there are two main ways in which they can be valued – going concern value and liquidation value. So, what’s the difference between the two?
Going concern value is based on the assumption that the business will continue to operate into the future. This is generally the most accurate way to value a business, as it takes into account things like future earnings potential, brand equity, and other long-term factors.
Liquidation value, on the other hand, is based on the assumption that the business will be sold off and its assets liquidated. This method of valuation is often used when a business is in financial distress, as it provides a more accurate picture of what the business is actually worth in the current market.
So, which method of valuation is best for your business? That depends on your specific circumstances. If you’re looking to sell your business, then the going concern value is probably the most accurate way to value it. However, if you’re simply trying to get a handle on how much your business is worth in the current market, then the liquidation value may be more appropriate.
Tommy Shek’s Concluding Thoughts
The going concern is the assumption that a business will continue to operate in the foreseeable future. This principle underlies financial reporting and is based on the idea that a company’s management has a reasonable expectation that it will be able to meet its obligations as they come due. Tommy Shek explains that the going concern assumption allows accountants to use historical data to predict future cash flows and make informed judgments about a company’s financial health. It also enables businesses to obtain loans and invest in long-term projects since lenders and investors can be assured that the money they’re lending or investing will eventually be repaid.