Business arcanery: Going concern

We'll start with the term "going concern." What the hell is a going concern?

From InvestorWords.com, "going concern" is:

The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets. For this to happen, the company must be able to generate and/or raise enough resources to stay operational.

Going Concern is an accounting term that makes its way into business jargon because it captures an important concept - "will the business be around for the long term?" A going concern is a business that has the cash and other resources to sustain itself. It can also be a business that has very little cash and assets but has strong and repeatable cash flow.

Accountants are required to assess whether a business is a going concern as part of issuing an opinion in an audit of a company's financial statements. I believe (but may be mistaken about this) that the business must have enough cash on hand to sustain lossses for at least the next twelve months to be considered a "going concern."

Many of our portfolio companies are not going concerns. Most startups are not going concerns. That explains the bags under most entrepreneurs' eyes. Startups are often operating at the edge, with the hope that customers or investors  (or both) will come through and keep them operating.

There is no shame in failing to obtain a going concern opinion, at least in my eyes. We work with such companies all the time. I suspect every great company wasn't one before they became one.

But it is important to understand this concept. And when you are doing business with a company, it is helpful to understand whether they are a going concern or not. If they are not, make sure to get paid quickly because they might not be around much longer. And if your company is not a going concern, you should expect vendors to be more antsy about getting paid because they are doing the same calculus that you are.

The purpose of this series on Business Arcanery is to decode business code words. Going Concern decodes into "are you going to be in business long enough to pay me?"

(Image source: lerner-udel)

(For more from Fred, visit his blog)