Business Value and Premise of Going Concern
Distressed Businesses: On the Road to Recovery by Josephine Giordano, MBA, CPA, ABV, CFF, CFE, CBA, ASA, CDBV, CIRA, CICA The Arizona economy and our local businesses are suffering significant distress in these uncertain times. A business’ going concern premise is compromised as growth and cashflows decline and risk increases. Financial distress is a condition in which a company or individual cannot generate revenue or income resulting in challenges in paying its financial obligations. This is generally due to high-fixed costs, illiquid assets or revenues sensitive to economic downturns. According to a report from the Federal Emergency Management Agency (FEMA), 40% of businesses do not reopen following a disaster, 25% fail within one year. The U.S. Small Business Administration found that over 90% of companies fail within two years of being struck by a disaster. The long-term recovery of businesses can be affected by numerous factors, including the industry in which it operates, how long it has been in business and its financial health before a disaster or economic downturn. Although we cannot predict how long the road to recovery will take, we can take steps to overcome some obstacles along the way.
As businesses begin to reopen, particularly through a phased-in approach, additional challenges requiring attention will begin to emerge that could adversely affect the reinstated operations. Under a going concern premise, the business is assumed to continue operating going forward. Ultimately, that is the road we are diligently working toward. In moving in that direction, we need to address some of the specific company risks that typically exist for distressed businesses: Key supplier dependence — Small companies typically depend on a single supplier for a product or service. Increased financial pressures could occur if key suppliers reduce credit terms and demand payment in full. Risks can be minimized by researching other suppliers and anticipating alternative credit arrangements. Customer risk — Customer perception is paramount during the partial/ complete reopening of businesses, particularly individual consumers. Clearly delineating and communicating steps taken to keep consumers safe is crucial in mitigating concerns. For commercial customers, establishing strategic plans to address quality of product/service and continued reliability will help to reduce risk. Workforce reduction risk — Crosstraining employees helps to alleviate the risk of decreased production or inconsistent quality of services provided. Litigation risk — Litigation risk is typically heightened during distressed situations. Proactive legal consultation is prudent to assist in managing contingent liabilities/litigious claims. Regulatory risk — Consider any proposed regulatory changes in the industry in which the business operates. Proposed changes could positively or negatively impact business operations. Forecast bias — Strategic planning involves cashflow forecasting which could tend to be overly optimistic or overly pessimistic in uncertain times. Setting baseline expectations that are reasonable is challenging. Periodically
NOV./DEC. 2020 AZ CPA
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