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Going Concern and Cash Flow Forecast

Is a cash flow forecast necessary for going concern audit evidence

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We are being audited and have been asked to provide forecasts by our auditors.

We have reserves of around £500k, adequate financing by the bank which is about to be renewed, and we have been trading for 19 years. We have forecast a profit to March 2020, and also to March 2021. 

I have provide a cash flow forecast to March 2020 but our auditors are asking for a cash flow forecast 12 months hence (i.e. to November 2020) I am aware about looking 12 months from the signing of accounts. 

Are cash flow forecasts always necessary? If I was to do one, it would take literally hours (doing it properly). My argument is that the cash flow forecast is showing that we are in a strong position at the end of March 2020 and that we are expected to be profitable again next year, even allowing for a drop in sales. Therefore, with our facility renewing, there is no problem. 

I'm of the option that forecasts are next to no use and are mainly manipulated to show what everyone thinks they should show. 

I'm aware auditors want their files to be as bulky as possible and there are requirements, but it just seems over the top, especially when forecasting can be so unreliable. They haven't even asked about our facility being renewed or how we would plug any gap in financing should sales drop, so it just seems like they're on autopilot, without actually accessing going concern. But it will be me that has to do copious and irrelevant work. 

Replies (9)

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Hallerud at Easter
By DJKL
12th Nov 2019 17:39

If you have a profit and loss forecast to March 2021, as you appear to have, do you have a balance sheet forecast with that as at March 2021 and would it be possible to convert that to a cashflow forecast or the more old fashioned statement of source and application of funds for the year to March 2021?

It always depends upon seasonality of say sales and purchase cycles, but if they are not so all over the place that monthly analysis of creditors/debtors would be required to do the cashflow surely a 12 month cashflow would not be that much work using past metrics of debtors/creditors re last month or so of sales and purchases. (Last year aged debtors/creditors might give a clue re relationship)

On the other hand if there are pinch points in the cycle within a year then if I were your FD I would actually want to know whether the facilities renewal was going to carry me through these.

As a matter of interest what did the bank accept in order that they renewed the £500k facility?

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By jasonowsky
12th Nov 2019 18:15

Thanks for your reply.

The bank requested draft accounts, and have a PG. To be honest, cash flow forecasts don't hold any interest for them, and it's a major international bank. The trouble is with forecasts that they are actually used based on previous years' results (and most companies will actually forecast a slight improvement). What they don't usually show is how unexpected bumps in the road ahead will be dealt with. Our bank facility is a heck of a lot more than £500k: that's our company's reserves.

The issue is we have several types of funding, all interlinked (import loans, invoice finance, overdraft, creditors) so it's really not as simple as analysing creditors/debtors. I agree, if it were like that, it would be very simple.

I may just do very simple forecasts, almost meaningless, but at least it will be a piece of paper.

For a very detailed forecast (which will be outdated by next week anyway), proper time needs to be invested.

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Replying to jasonowsky:
Hallerud at Easter
By DJKL
12th Nov 2019 18:35

Sorry- misread the reserves bit thought that was the bank facility.

By reserves do you mean the retained profits or do you mean a spare pot of cash?

At the end of the day what is adequate depends on nature of the business, with little knowledge of turnover/costs/profits/assets/liabilities it is hard to judge, for instance Thomas Cook had far more than that in the bank and in reserves yet.....

I think what I would be asking is why the auditors particularly want this for this year but say not previous years, have there been events re facility renewal/business operations that cause them concern etc?

I am the opposite of you, I do not like profit forecasts (except to forecast tax payments) I prefer cashflow forecasts though these days, thankfully , I do not really have to bother that much as we have a very predictable business re income with limited cost fluctuations, low gearing and hefty cash in hand , however from 2008 to 2016 I was pretty much rolling and updating five year forecasts every month to appease our banks so do know the work involved (though a lot simpler if you can produce from accounts software on in a business with virtually no debtors and the only big creditors tend to be the bank and HMRC.)

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By paul.benny
12th Nov 2019 19:37

Look at the question another way:

The accounts are ultimately the Directors' responsibility. All that boiler plate stuff in the Directors' Report includes statements about having made sufficient enquires etc to be satisfied that the going concern concept is appropriate (and for 12 months from approval of the accounts).

If you have documentation to justify this - which may or may not in a cashflow forecast - your auditors should be satisfied. If, as probably the case in many companies, you haven't made that assessment (a) the only resort the auditors have is to seek a 12 month cashflow statement.

To be fair, it sounds like you do have most of the elements, even if they're not set out in a document that the board can approve and wave at the auditors.

I sympathise with your complaint about the audit firm doing going concern review on autopilot.

FRC requirements for going concern review are being strengthened - probably not directly relevant here.

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By b.clarke
14th Nov 2019 11:09

The first point to make here is: if you haven't got it in writing, you haven't got it. That applies to you, just as much as the auditor. The directors are required to go on the record as having looked 12 months ahead of the accounts signing date and found the going concern position satisfactory. So how do you evidence that?

At the very least, I would recommend reaching that opinion in a board meeting, evidenced by the minutes which spell out the directors' thinking. And it wouldn't seem unreasonable for the directors to want a briefing paper from you on the subject.

A briefing paper doesn't have to be long, and the benefit of it would be to force you to spell out your reasoning clearly. Some of what you have written seems bit fuzzy; it's all very well saying that it's been fine so far, for 20 years or whatever, but hey, things change. You said yourself that a cash flow forecast would be out of date as soon as it was written. Yet you also say that the forecast shows a strong position at the end of March 2020....

So, the bottom line. You need to put it in writing, so that the directors can consider the position and put it in writing, so that the auditors can issue their opinion (in writing).

Whether a further cash flow forecast is needed can only be determined by a discussion which is outside the scope of this forum. What's essential is that the directors consider the position, reach a reasonable conclusion and document it. If they have done that, then the auditors should be satisfied.

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Replying to b.clarke:
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By jasonowsky
14th Nov 2019 13:05

Thanks for your reply. I didn't say that there needed to be no evidence of going concern, just that a cash flow forecast based on one set of assumptions that gets out of date as soon as it's written isn't actually of much benefit. I'm sure a great number of companies that have been in trouble produced wonderful cash flows, but that did no good when the assumptions went wrong. It's just too much reliance on numbers (although some numbers are obviously appropriate).

Exploration of increase in personal guarantees, possible change in creditor terms, greater access to credit insurance may appear 'fuzzy'. However, in the real world, this probably becomes more important than being able to point to a cash flow.

I think you've outlined elsewhere is extremely useful advice, but the general point is that the auditor needs a bit a little bit more flexible and creative than just demanding a simple cash flow.

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By [email protected]
14th Nov 2019 12:16

To me a cashflow forecast is the most important. not least!

If you already have a P&L Forecast it is straight forward to derrive a cashflow from that.
If, as infered, you have a number of financial instuments on the balance sheet, demonstrating how you are to service those is rather important, don't you think?

And as others have said document the directors review and agreement to said forecasts.
All forecasts go "out of date" quickly, that's why any sensible business reforecasts regularly

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Replying to [email protected]:
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By jasonowsky
14th Nov 2019 13:17

Thank you for your reply. I think by 'servicing financial instruments' you mean 'staying within your facility limits'. That's obviously vital, but I'm not sure relying on a cash flow forecast that demonstrates adherance to the limits can do that. Forecasts are useless unless you consider the probability that there can be variances to them, and exploring the effect of any variances. Half of cash flows I've seen in my long years are based on such simple assumptions with no interrogation that they're not worth the excel cells they're printed on.

I just think the profession needs to be a bit smarter in evaluating going concern and not thinking that a spread sheet answers all the questions that no one drills down into.

Many thanks for your answer

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By badgmalt
14th Nov 2019 12:46

Preparing a funds flow forecast from P&L is relatively straight forward even with structured finance arrangements in place. Aside from P&L there are some other building blocks you will need, such as capex plan, DSO, CPO, dividend plan, existing finance servicing. Having a model that integrates P&L, BS & funds flow is an important management tool whatever your auditor might say: in environments where strategic as well as tactical changes demand financial input to decisions, particularly where there's structured finance, is best practice rather than a "nice to have" to satisfy an auditor.

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