If your finance team has just told you that cash could run £40,000 short of what you need over the next year, you are not just facing a funding problem — you are facing an accounting one too. Under UK accounting rules, directors must formally decide whether the business can keep trading for at least twelve months from the date the accounts are approved. Get this wrong, and you risk signing accounts on the wrong basis, misleading lenders and shareholders, or even facing personal liability if the company later fails. This article explains what ‘going concern’ really means, walks through a worked cash flow example showing exactly how a £40,000 shortfall is identified, and sets out what directors need to do once that number appears on their desk.
What ‘Going Concern’ Actually Means
Going concern is simply the assumption that a business will continue trading for the foreseeable future — normally taken as at least twelve months from when the accounts are approved. Almost every set of financial statements is prepared on this basis, because it allows assets to be valued as if the business will keep using them, rather than being forced to sell everything off quickly. If directors conclude the business cannot continue, the accounts must instead be prepared on a ‘break-up’ basis, where assets are valued at what they would fetch in a forced sale — usually far less than their normal worth. This is not a box-ticking exercise. It directly affects the numbers that appear in the accounts, the confidence lenders place in them, and the legal responsibilities directors carry.
The £40,000 Shortfall: A Worked Example
Take ABC Engineering Ltd, a fictional but realistic £3.2 million turnover manufacturer. The finance manager has built a rolling twelve-month cash flow forecast after losing a major customer and facing higher raw material costs. The company has an agreed overdraft facility of £70,000 with its bank. The forecast below shows cash steadily declining across the year as payments outstrip receipts in each quarter.
| Quarter | Opening cash | Receipts | Payments | Closing cash |
|---|---|---|---|---|
| Q1 | £150,000 | £620,000 | £680,000 | £90,000 |
| Q2 | £90,000 | £580,000 | £650,000 | £20,000 |
| Q3 | £20,000 | £600,000 | £690,000 | (£70,000) |
| Q4 | (£70,000) | £610,000 | £650,000 | (£110,000) |
The lowest point in the forecast is a closing cash balance of negative £110,000 in Quarter 4. Because the company only has a £70,000 overdraft facility agreed with its bank, the gap between what it needs and what it has access to is larger than the overdraft can cover.
| Lowest forecast cash balance (Q4) | -£110,000 |
| Agreed overdraft facility | £70,000 |
| Funding gap (shortfall) | £40,000 |
A cash shortfall does not automatically mean the business will fail. It means directors must demonstrate — with evidence, not optimism — how the gap will be closed, whether through new finance, cost cuts, asset sales, or renegotiated terms. The accounts, and the going concern statement within them, must reflect that evidence.
Why This Changes the Accounts
Once a shortfall like this is identified, directors cannot simply carry on preparing the accounts as normal. Under both UK GAAP (FRS 102) and IFRS, directors must assess all available information about the future — typically at least twelve months ahead — and decide whether material uncertainties exist that cast significant doubt on the company’s ability to continue trading. If such uncertainties exist, they must be disclosed in the notes to the accounts, even if the directors still conclude the going concern basis is appropriate. If directors conclude the company cannot continue, the accounts must be restated on the break-up basis, which typically reduces the value of assets significantly because they are valued at forced-sale prices rather than their value in continued use.
| Account | Dr | Cr |
|---|---|---|
| Impairment loss (profit and loss account) | £95,000 | |
| Property, plant and equipment | £95,000 |
Illustrative entry if directors conclude the break-up basis applies, restating machinery and equipment from £310,000 carrying value down to an estimated forced-sale value of £215,000.
If directors continue trading and incurring new debts after they knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation, they can be held personally liable for wrongful trading under the Insolvency Act 1986. A £40,000 shortfall identified in a forecast is exactly the kind of signal that must be acted on, documented, and reviewed regularly — ignoring it is far riskier than disclosing it.
What Directors Can Do Now
- Update the cash flow forecast monthly, not annually, so the shortfall is tracked as it changes rather than discovered too late.
- Speak to the bank early about extending the overdraft to cover the £110,000 peak deficit or arranging a short-term loan to bridge the £40,000 shortfall before it occurs.
- Identify specific, costed mitigating actions — such as delaying capital spending, chasing overdue customer payments, or renegotiating supplier terms — and quantify their cash impact.
- Document the going concern assessment formally, including the assumptions used, the mitigating actions agreed, and the board’s conclusion, so it can be shown to auditors, lenders, and shareholders if challenged.
Key Takeaways
- A cash shortfall against your available facilities — not just a falling bank balance — is the real trigger for a formal going concern review.
- Compare your lowest forecast cash point against agreed facilities, not current cash, to find the true funding gap, just as ABC Engineering’s £110,000 low point against a £70,000 facility revealed a £40,000 shortfall.
- Disclosure of material uncertainty does not mean the business has failed; it means directors have been transparent about risks and the actions being taken to manage them.
- Keep a written record of your going concern assessment and update it whenever the forecast materially changes, to protect both the accuracy of the accounts and the directors personally.
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