Wednesday, September 9, 2009

Going concern opinions - A Tough Call for the CPA

It is a basic theory in accounting that a business should be considered a going concern which means the business will be in operation usually over the next 12 months. If a business is a Going Concern the business has little risk of liquidating or ceasing operations in the foreseeable future. Financial statements are prepared with this theory as the premise.

A Going Concern opinion is one of the most difficult opinions a CPA needs to render. A Going Concern Opinion is rendered by a CPA when it is the opinion of the CPA that the company is no longer a going concern and that there is considerable risk that the company will not be in business by the end of the next fiscal year. Material uncertainties must exist to lead the CPA to this opinion. These opinions are difficult to render because it is not good news for management, the company’s lenders, the company’s suppliers and creditors. Based on all of this dissatisfaction the CPA has to have as much evidence as possible to support this opinion. If the CPA does not issue a going concern opinion and the business liquidates or ceases operations within the fiscal year, the CPA will be at tremendous risk. The material uncertainty that exists could be something that is more evident like the strong likelihood of an unfavorable ruling on a lawsuit, or the strong likelihood of an unfavorable geo-political event.

Would CPA’s have less risk if they had access to financial modeling tools that can forecast with great accuracy based on a solid set of reasonable assumptions the future cash position of a company at different levels of sales volumes and expense levels when rendering going concern opinions? I think so. It not only reduces risk for the CPA, but provides a more solid basis for explaining to the client why a going concern opinion is being rendered.

Currently most CPA’s use metrics and similar indicators to help render their opinion. If financial modeling tools were available at a reasonable cost that identified with great accuracy the forecasted cash position, inventory position and liability position of the company at selected volumes of sales, selected levels of expenses, and selected levels of inventory in confluence with a solid set of reasonable assumptions I believe that would give the CPA greater confidence and more solid footing in rendering this difficult opinion.

Next Step CFO has such a financial modeling tool and it is called cashtell.

Wednesday, September 2, 2009

Learn From Your Competition

Most of you who read this post will have competition. Competition is what makes us better business people. Your first step in reviewing the competition is Know Who the Competition is! I can’t tell you how many people go into business without knowing who their competitors are and what they do. Not knowing who your competition is would be like a team from the National Football League preparing for the Super Bowl and not know who they were playing and not doing any scouting report. You are not learning who the competition is so you can worry and obsess about them. You are learning who the competition is so you can learn from them and develop strategies to compete against them.

One thing I always used to do is go to trade shows to seek out who my competitors are. Trade shows are a great way to stake out your competition. Get information from their booths and even speak to their representatives. Look at their advertisements; discover the different ways they market and communicate to the market place. See if you can figure out how their logistics work or if they use contract manufacturers. See if you can find out what their distribution strategy is. If you market regionally you should develop relationships with businesses that do what you do who are not in your market. I cannot overemphasize the abundance of information you will get out of those relationships.

Take what you learned from the competition and put together a plan on what things you will do the same and what things you will do differently. You need to figure out what separates your business from the competition.

A valuable CFO Service is to help and influence business owners to learn more about what their competition is doing and then help them figure out a strategy to compete against those competitors.