Going concern warning
Also called: going concern, substantial doubt, going concern doubt, going concern qualification
A disclosure that there is substantial doubt about a company's ability to continue operating and meet its obligations for one year after its financial statements are issued.
Last verified
What it means
Under US accounting rules (ASC 205-40), management must evaluate each reporting period whether conditions raise substantial doubt about the company's ability to continue as a going concern within one year after the financial statements are issued. If they do, and management's plans do not alleviate that doubt, the company must say so in the notes. The independent auditor's report on annual financial statements also includes an explanatory paragraph when the auditor concludes substantial doubt exists.
Why it matters
A going concern warning is the company's own statement, reviewed by its auditor, that its current resources do not clearly cover the next 12 months. For small companies it usually means new financing is needed. That financing often involves selling shares, which is why the warning frequently appears alongside offerings, equity lines or convertible notes. It can also affect a company's ability to borrow or contract on normal terms.
A going concern paragraph is not a prediction of bankruptcy. Many companies carry one for years and keep raising money. But it is a clear signal about cash runway.
Worked example
Hypothetical: Company X reports $4,000,000 of cash and an operating cash outflow of $3,000,000 per quarter. With roughly four months of cash and no committed funding, management discloses substantial doubt. Three weeks later it files a 424B5 for a $6,000,000 offering.
How to spot it
Search the 10-K or 10-Q for "substantial doubt" and "going concern". It usually appears in the liquidity section of the MD&A, in a note titled "Liquidity and Going Concern" or similar, in risk factors, and in the auditor's report in the 10-K. See Going concern warnings.
Related terms
Guides that use this term
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