Practical guide for UK startups to prepare a defensible going concern assessment

Understanding the Going Concern Requirement in UK GAAP

For many early-stage UK founders, the year-end statutory accounts feel like a formality until the auditor asks a simple, yet deeply challenging question: “Can you prove the company is a going concern?” This is not just a box-ticking exercise. It is a direct inquiry into your startup financial health, your cash runway, and your company's fundamental viability. With a 2023 CB Insights report finding that 'running out of cash' is a top three reason for startup failure, this assessment is more critical than ever. This guide provides a practical, three-step process for how to assess going concern for UK startup accounts, helping you build a defensible case that satisfies auditors without derailing your next fundraise.

Before diving into the process, it is essential to understand the core concepts. The ‘going concern’ basis of accounting is the default assumption that your business will continue to operate for the foreseeable future. For unlisted UK companies, the relevant accounting standard governing this assessment is FRS 102. You can find more details in our hub on statutory financial reporting.

The standard is very clear on the timeline. As the ICAEW explains, the going concern assessment must cover a period of at least 12 months from the date the statutory accounts are authorised for issue, which is typically when they are signed by the directors. This look-forward period is often longer than founders anticipate. For example, if your company’s year-end is 31 December 2023 and you sign the accounts on 31 March 2024, your forecast must demonstrate survival until at least 31 March 2025.

If, after your assessment, a significant doubt remains about your ability to continue operating, you may need to include a ‘Material Uncertainty Related to Going Concern’ (MURGC) disclosure in your accounts. This is not an admission of failure. Rather, it is a formal and transparent statement about known risks to your business survival, such as a dependency on future fundraising. Understanding this distinction is key: a going concern issue is not the same as a business failing; it's an assessment of future viability required for reporting going concern risks.

Step 1: How to Assess Going Concern with a Defensible Financial Forecast

Founders often ask: “My forecast changes weekly. How do I build something solid enough for an audit that covers at least 12 months after we sign the accounts?” The answer lies in creating a forecast specifically for this purpose, which is different from the one in your investor pitch deck. Auditors need a conservative 'base case' forecast, not an optimistic one. This isn't your stretch goal.

Building Your Base Case Model

While FRS 102 specifies at least 12 months from the signing date, a practical forecast horizon to ensure compliance is 15 to 18 months from the company's financial year-end. This buffer accounts for the typical time it takes to prepare, audit, and sign off on the accounts. For more on timelines, see the filing process for Companies House.

What founders find actually works is building this model in a spreadsheet. You should pull actual historical data directly from your accounting software, such as Xero, to ground your starting position in reality. This base case becomes the foundation for your entire assessment. It must realistically reflect your cash inflows and outflows, including salaries, supplier payments, R&D costs, and other operational expenses.

The critical distinction is between your ambitious goals and a defensible projection. Your base case should be built on evidence, not hope. Consider these examples for UK-based startups:

• B2B SaaS Startup: An optimistic investor forecast might assume the company closes ten new enterprise clients based on a full sales pipeline. In contrast, a defensible 'base case' audit forecast would only include revenue from existing, signed contracts. For new business, it would forecast revenue only from prospects in the final negotiation stage, applying a conservative close rate based on historical performance. It would also model customer churn using past data, not just assuming everyone renews. Our guide on revenue recognition policies provides more context.
• E-commerce Startup: An investor forecast might project a 30% month-on-month growth driven by a new marketing campaign. The base case, however, would model growth based on historical customer acquisition costs and conversion rates. It would also factor in potential supply chain disruptions and include prudent estimates for inventory holding costs and potential write-offs.

Documenting Your Assumptions

Your assumptions are as important as your numbers. Your auditor will scrutinise the rationale behind your projections, so you must keep a clear, contemporaneous log explaining each one. This documentation turns a simple spreadsheet into a credible piece of evidence.

A good assumption log includes:

1. The Assumption: State the projection clearly (e.g., "New monthly recurring revenue will be £15,000 per month from Q3 onwards").
2. The Rationale: Explain the 'why' behind the number (e.g., "Based on two signed contracts worth £10,000 MRR and one verbal commitment for £5,000 MRR from a late-stage prospect").
3. The Evidence: Link to the supporting proof (e.g., "See signed contracts in Appendix A; see email correspondence with Prospect X in Appendix B").

This level of detail demonstrates a rigorous and thoughtful approach to financial management, which builds significant auditor confidence.

Step 2: Stress-Testing Your Forecast to Prove UK Company Viability

When your auditor asks for ‘evidence’ and ‘stress tests’, what they actually want to see is that you have considered plausible negative scenarios and have a credible plan to respond. Stress-testing involves modelling how specific adverse events would impact your cash runway. It is a core part of providing robust financial disclosure for startups and proves you are actively managing risk. Auditor responsibilities were strengthened in ISA 570 (Revised 2024), meaning they will apply greater professional scepticism to your assessment.

A scenario we repeatedly see involves testing against common startup challenges:

• Revenue Shock: Model the impact of a major customer churning unexpectedly, or a large deal you forecasted in your base case slipping by six months.
• Fundraising Delay: If you are reliant on future funding, model what happens if the round you planned to close in Q3 is pushed to Q1 of the next year.
• Cost Overrun: Analyse the effect of a key software supplier increasing prices by 20%, or an unplanned but critical senior hire becoming necessary sooner than expected.

The Hierarchy of Audit Evidence

For each scenario, you must provide evidence to support your position that the company can weather the storm. Auditors think in terms of a hierarchy of evidence, from strongest to weakest.

• Strong Evidence: This includes legally binding documents. Examples are signed customer contracts, executed investor term sheets, committed credit facilities from a bank, or approved R&D tax credit claims.
• Supportive Evidence: This is useful for demonstrating intent and progress but is not conclusive. Examples include a detailed CRM pipeline showing late-stage deals, positive email correspondence with potential investors, or board minutes documenting an approved plan to cut costs.
• Weak Evidence: This includes uncorroborated management assertions, such as verbal commitments from investors or an optimistic sales pipeline with no historical basis. This type of evidence carries very little weight in an audit.

Creating a 'Going Concern Memo'

The reality for most Pre-seed to Series B startups is more pragmatic than writing a novel. The output of this work is often a concise ‘Going Concern Memo’ that summarises your assessment for the board and the auditors. An effective structure typically includes:

1. Conclusion: A clear statement from management asserting that, after due consideration, the company remains a going concern.
2. Base Case Summary: A high-level overview of the primary forecast and its key assumptions about revenue, costs, and cash flow.
3. Stress Tests Performed: Details of the specific scenarios modelled (e.g., "a six-month fundraising delay") and their impact on the cash runway.
4. Mitigating Actions: A credible description of the specific, actionable steps management would take in response to each stress scenario. These must be within the company's control, such as freezing all non-essential hiring, reducing monthly marketing spend by a specific amount, or deferring non-essential R&D projects.
5. Appendix: A link to the detailed financial model spreadsheet, including the assumption log.

This memo, grounded in the principles of FRS 102 guidance, transforms your assessment from a simple forecast into a defensible, evidence-based case for your startup’s financial health.

Step 3: Reporting Going Concern Risks with a MURGC Disclosure

One of the toughest questions arises when a stress test reveals a problem: “Our stress test shows our runway gets tight. Do we have to disclose this, and will it kill our fundraise?” If a plausible adverse scenario exists where you would exhaust your cash reserves, and your mitigating actions are not entirely within your control (like securing new funding), you will likely need to make a Material Uncertainty Related to Going Concern (MURGC) disclosure.

It's about transparency, not admitting defeat. This disclosure should be viewed as a signal of strong, transparent governance. It informs investors and other stakeholders that you understand the risks inherent in your early-stage company audit and have a plan to manage them. For sophisticated venture capital investors, this transparency can build trust rather than create alarm. They are in the business of pricing risk, and your honest assessment helps them do that.

The disclosure itself appears in the notes to your statutory accounts. It should clearly explain the principal events or conditions that cast significant doubt on the going concern assumption and then outline management's plans to address them.

Mini-Case Study: Pre-Revenue Biotech Startup

Consider a pre-revenue biotech startup based in the UK, whose operations are entirely dependent on grant and equity funding. While preparing its accounts, its cash was projected to run out in nine months. The company was in the middle of a Series A fundraise expected to close in six months.

• The Issue: The fundraise was progressing well but was not yet guaranteed. A plausible three-month delay in the funding round would exhaust their cash reserves completely. This dependency on an external event, not within management's control, created a material uncertainty.
• The Disclosure and Outcome: The company included a MURGC disclosure. In the notes to the accounts, it stated that its going concern status was dependent on the successful and timely completion of its Series A financing. The note detailed the board’s confidence in the round, progress with named investors, and a contingency plan to reduce specific R&D expenditures to extend the runway if needed. This proactive communication was received positively, demonstrating a realistic and responsible management team and strengthening their position during negotiations.

Practical Takeaways for Your Assessment

Navigating the going concern assessment is a crucial part of managing your UK company's viability. It requires a forward-looking, evidence-based, and conservative approach to financial management. The lesson that emerges across cases we see is that preparation is everything.

Here are four practical takeaways to implement in your startup:

1. Start Early and Plan Ahead: Do not wait for your auditor to ask the question. Begin your going concern assessment at least three months before your financial year-end. This gives you ample time to build a robust model, identify potential issues, gather the necessary evidence, and develop credible mitigating actions.
2. Maintain Two Forecasts: Keep your optimistic forecast for investor conversations and internal goal-setting. However, build and maintain a separate, conservative 'base case' forecast specifically for audit and compliance purposes. This separation of purpose is crucial for clear and defensible reporting.
3. Document Everything Rigorously: Your financial model is only as credible as the assumptions that underpin it. Keep a detailed log explaining the 'why' behind your revenue projections, cost estimates, and hiring plans. Link every major assumption to a piece of evidence, even if it is just an internal board resolution.
4. Reframe the Disclosure as a Strength: If a material uncertainty exists, do not view the disclosure as a setback. Treat it as an opportunity to demonstrate strong governance and transparent communication about your business risks. As expert guidance indicates, auditor scrutiny increases significantly when a startup has less than 18 months of cash runway post-fundraising. Proactively addressing this with a robust assessment shows you are in control.

For more information, see our comprehensive hub on statutory financial reporting.

Frequently Asked Questions

Q: What is the difference between a going concern issue and insolvency?

A: A going concern issue is a forward-looking accounting judgement about whether a company has the resources to operate for at least 12 months from signing its accounts. Insolvency is a legal state where a company cannot pay its debts as they fall due. A material uncertainty about going concern is a warning sign, not a declaration of insolvency.

Q: Can our accountant prepare the going concern assessment for us?

A: Your accountant or advisor can help you build the financial model and memo, but the ultimate responsibility for the assessment rests with the company's directors. Management must make the final judgement and formally approve the assessment, as they are the ones signing the statutory accounts.

Q: Our startup has over 18 months of cash runway. Do we still need a detailed assessment?

A: Yes, though the process may be simpler. You still need to prepare a forecast and document your assessment, but if your cash runway is clearly sufficient even under stressed conditions, the process is more straightforward. The key is to document the conclusion that no material uncertainty exists and the basis for that judgement.

Q: Will a MURGC disclosure affect our ability to get a bank loan or R&D tax credit financing?

A: It can increase scrutiny from lenders. A MURGC signals risk, so creditors will likely ask more questions and may require additional assurances or covenants. However, a transparent and well-explained disclosure, coupled with a credible plan, is often better than surprising a lender with bad news later.