What does it mean when a company is a going concern?

Published: 29th June 2021

Trading as a going concern following cash flow difficulties

When a company operates as a going concern, it means that it is expected to carry on trading with no threat of liquidation for 12 months or more. The company is not in danger of closure due to insolvency, but can be relied upon to survive or thrive.

If a company is experiencing severe financial decline and insolvency is a credible threat, however, establishing whether it is a going concern is crucial. It dictates whether or not the business needs to cease trading to protect its creditors - a statutory obligation for limited company directors under UK insolvency law.

So when is a company a going concern, and what does it mean?

Begbies Traynor Group is the UK’s leading corporate rescue and recovery practice, and can provide the independent advice you need. We will professionally assess whether your company is a going concern, and provide practical, reliable support where necessary.

When is a company a going concern?

The information presented in the company’s accounts determines whether or not a business is a going concern. Accounting data needs to be accurate, therefore, and provide a fair picture of the business as a whole.

With a view to assessing going concern, companies should undertake regular cash flow reviews, prepare budgets and sales forecasts, in addition to half-year and full year accounts. This makes directors well placed to arrive at an accurate evaluation of the status of their company.

Company borrowing should also be scrutinised and assessed as to the company’s continued ability to repay. Additionally, a material issue that can affect a company’s solvent status is the potential for contingent liabilities, which could tip the scale towards insolvency. 

Warning signs that a company may not be a going concern

Specific warning signs exist that indicate a company is no longer a going concern, or is approaching that position. These include:

  • Poor cash flow
  • Inability to obtain credit or secure borrowing
  • Growing levels of bad debt
  • Difficulty in meeting existing liabilities – servicing loan repayments, for example
  • Existing or threatened legal action against the company

Directors should seek professional insolvency advice as soon as possible if any of these potentially damaging issues exist. Acting quickly in this respect can save a business that is heading towards insolvency, from liquidation and closure.

Can an insolvent company be sold as a going concern?

Even if a company is insolvent, it may be possible to sell it as a going concern:

Company administration

If a company is deemed a going concern and is sold to a third party out of administration, employment contracts are protected through TUPE legislation – the Transfer of Undertakings (Protection of Employment) regulations. In this way, jobs can be saved and business continuity protected.

Pre pack administration

A business might be sold as a going concern on the open market, but a pre pack administration sale can be more appropriate. This involves selling the underlying assets of the business, sometimes to the existing directors prior to establishing a new venture.

Company Voluntary Arrangement (CVA)

In addition to company administration and pre pack administration, a Company Voluntary Arrangement can be a viable option for struggling businesses trying to maintain going concern status. A CVA restructures the company’s debts so they become more affordable, and provide a higher return for creditors than other potential solutions.

CVAs are also beneficial for company directors, as they do not lose control of the company. They can continue on, steering the business away from serious financial issues over the long-term, and avoiding legal action by the creditors included in the agreement.

If you would like more information on going concern status and what it means for your company, please get in touch with our partner-led team at Begbies Traynor Group. We can offer you trustworthy advice, and detailed insight into your company’s position. Please call to arrange a free, same-day consultation – we operate an extensive network of offices throughout the UK, so you are never far away from professional help.

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