The Key Indicator of the Second Most important topic right now…?
The most important thing right now is health, and I hope you, your friends and family are in good health, or good hands. If you are in good health, the next bit may be relevant: if not – just concentrate on getting better.
The second most important topic right now – assuming the most important is good for you – is financial health. The world economically is in recession, and depending on which figures you look at, this is the worst since the Depression of the 1930s, or even since the First World War and Flu epidemic in 1914-18. The numbers for unemployment in the US for example, undoubtedly show the most sudden increase on record.
Hidden away is some news about a key indicator of financial health – Audit Certificates. While dull in the extreme, they provide a useful view about a company’s prospects. In short, if an auditor “qualifies” a company’s accounts, they are saying there is a problem. This is especially important if you are dealing with a company – whether client, partner or supplier – where you need them to stay in business. Some key words to look out for in Audit Reports – Going Concern, Emphasis of Matter.
The Financial Times on Tuesday 14th* reported that auditors are now coming under pressure from some company directors to NOT “qualify” the accounts, suggesting that the effect of Covid-19 is temporary and effect everyone, and that these are extreme economic times but “this too shall pass”.
But Auditors are in a tricky position. The collapse of Carillion, British Home Stores, Patisserie Valerie & Goals Soccer Centres – among others across the world – all occurred during the “good times“ (remember them?) and in the presence of an unqualified Audit Certificate, or Certificates. In the UK the Auditors regulatory body, the Financial Reporting Council, is being replaced – itself an indicator that all is not well in the Audit world.
A qualified Audit Certificate is a sure sign of a problem: an unqualified one does not guarantee there is NO problem.
Qualified Audit Certificates were relatively a rare but seen by some as not rare enough. They may become more frequent as many businesses struggle under lockdown. Another reason why it is useful to be able to “read” a set of accounts and look for signals that a company may be struggling.
*https://www.ft.com/content/bd1bdf51-2211-44b2-a0fb-f90c4ff57d14
(You may be able to access this free as long as you only look at the and maybe 2 other articles. Otherwise it’s a subscription. The FT knows how to manage cash flow…)
Buzzwords of the Week –Operating Profit
Definition – an accounting metric measuring the profits a company generates from its core business functions, where the deduction of interest and taxes is excluded from the calculation. This operating value likewise excludes any profits earned from the firm’s ancillary investments, such as earnings from other businesses a company may be partially vested in.
Alternate View – the above is correct but right now – who cares? The only area of finance being looked at right now is cash flow, especially the forecast. Will there be enough money in the bank to pay people and essential bills? Once that it sorted, some may then revert to thinking about how much profit they are making. Probably not this week.