Digital Agency and Going Concern Principle of Accounting
Going Concern principle is the assumption that an entity will stay in business for a long time into the foreseeable future. Alternately, this implies that the entity won’t be compelled to end its operations or liquidate its assets anytime soon. The principle defines a company’s ability to continually function as an entity regardless of who joins or leaves their team and it applies to all companies including a digital agency like ours. An agency is said to not be Going Concern if its future success cannot be envisaged.
Importance of ‘Going Concern’ Principle to A Digital Agency?
A digital agency is one that gives strategic, creative and technical development of screen-based products and services. They deliver technology-based solutions to their clients and are mostly involved in, online and offline marketing, web development, mobile application and development, e-commerce consulting etc.
Every organization no matter the nature of their services needs to be certain about the continuity of their business- one of the qualities that will guarantee the survival of a digital agency is accountability. A digital agency must be accountable enough to properly track their expenses, revenue, equity, assets and liabilities; their ability to do this will aid the continuous operation of the company in the future. In order to stand the test of time as a digital agency, you must prepare a General Purpose financial statement to reflect that the company can and will continue its business even in future. If the company is not expected to continue operations or would probably be required to wind up, its financial statements will reflect a break-up i.e. the difference between revenue and cost will be very minimal and, in some cases, there won’t be any difference at all.
Going Concern concept of Accounting is important because it reveals the financial stability of a company to its shareholders and helps digital agencies secure long term loans or investment.
Some factors that can affect the ‘Going Concern’ of a digital agency include,
- High gearing level (when debt is more than the equity of the company)
- Non-payments or default of loans
- Non-payment of tax which leads to excess tax penalties and heavy fines
- Adverse Government regulations
- Negative cashflow
- Extreme legal charges
- When liabilities exceed Assets
- Insufficient financing of the company (liquidity issues)
- Overtrading (aggressive growth strategy not backed up with sufficient financing)
- Lack of innovation
With the following in place, a registered digital agency should continue to exist in the foreseeable future.
- Human asset (skilled and unskilled labour)
- A reserve base (stored money for a specific purpose)
- Tax payment
- Ensuring that debts don’t exceed equity
- Loan repayment as and when due
- Good management system
- Ownership must stand as a separate entity from the business