You’re a CFO in the final lap of the annual financial statements audit – almost all ticking and checking done – when along comes the audit manager and asks you for a cash flow forecast. You ask why? The audit manager says something about the going concern assumption and their mandatory audit procedures, and then you remember that you prepared a cash flow forecast some weeks ago for the CEO. Perhaps that will be sufficient?
Perhaps not. When auditors ask for a cash flow forecast, they are asking for something much more prescriptive, particularly as they are mandatorily required to meet the requirements of Australian Auditing Standards ASA 570 Going Concern. From our experience, here are three key essentials that you’ll need to manage with your auditor and provide in the ‘cash flow forecast’ that they have requested:
Timing
The cash flow forecast must be a minimum of 12 months from the date of signing the financial statements, not from the year-end date of the statements. This means that for
a company with a June financial year end, if they expect to sign at the end of September, the cash flow forecast used to support the going concern assumption should extend out (as a minimum) to the end of September of the next year. The trick then for CFOs is to prepare, in this instance, a 15-month cash flow forecast and then repopulate the forecast months of trade from report date to signing date with actual results. Subsequently, it is important for the CFO to maintain accurate and reconciled records beyond the balance date of the audit.
Make that cashflow bend and flex
Many cashflow forecasts include assumptions that may or may not materialise – think a capital raising, rolling of debt at maturity, the outcome of legal action or the contractual execution of an existing sales pipeline. It’s important to demonstrate these plans in the forecast, but your auditor will challenge you as to how reasonable or feasible they may be. Therefore, you should be able to demonstrate with your cash flow forecast model how the business has available contingencies to continue as a going concern in the event these does not occur and often relate to discretionary expenditures. Some common levers we see include:
- Pulling back spend on research and development programs
- Scaling back the spend on marketing, and
- Curtailing corporate overhead expenses.
Make your cash flow forecast 3D
Your auditor is required to be sceptical – a cash flow forecast is not a complete picture of the enterprise and you will need to demonstrate your control not only of cash, but of your overall reserve of working capital. Therefore, although refusing to pay creditors in your cash flow forecast may increase cash, it, if anything, increases the going concern assumption exposure of the enterprise.
Above all, these cash flow practices should not be restricted to the audit process as they have a lot of commercial value, for example:
- The time horizon of a good cash flow forecast should equate to a year minimum
- A forecast should be tested for its sensitivities to changes in assumptions and judgements, and
- Cash, for forecasting purposes, shouldn’t be examined in isolation from reserves of working capital.
Smart CFOs will adopt enhanced cash flow forecasting practices for the benefit of the overall enterprise as well as satisfying the audit needs.
For further information, refer to the William Buck publication Navigating Uncertainty: A Practical Guide to Going Concern Assessments.
