Sunday, October 10, 2010

Going Concern to Liquidation

My friends who belong to finance field are very familiar with my subject terminologies, going concern is an accounting assumption that assures organization will be operating in foreseeable future, and will fulfill its all  obligations  timely. Liquidation value is dead end of organization and is calculated when firm can not generate profit in future, and will not be able to fulfill its obligation in near future. In general going concern and liquidation values are two extreme opposite ends of a scale , where between an organization lives, and this is the central idea of this blog that how organization is balanced in this seesaw game.

An investor that has his stake in an organization will always want to keep his organization away from liquidation end and like to be in safe zone of going concern, so that his future return should be assured and guaranteed. surface where organization resides, infact has slope towards liquidation side, and if the organization is not managed it will start falling automatically towards  liquidation, and will loose his value.

Organization is the multitude of business and Financial risk, particularly interest rate risk, currency exchange risk, credit risk and price risk, and these risk drive organization toward liquidation side of scale, if it is not managed properly. Management who is responsible to take organization in direction of success, always try to medicate these risk by using derivatives and hedging technique so that organization remain in safe zone.

After current and past accounting scandals, particularly Enron, user of companies financial has started demanding transparency and maximum disclosure, so that they could be alarmed about company risk before it comes in liquidation zone .

Capital Budgeting process wherein management strive to evaluate the project that will increase share holder worth , and decisions of capital budgeting is based on cash flow in term of return, which is an essential financial indicator to recognize that the entity is going concern.

And then we further study in corporate finance about the leverage that depicts the slope of organization's surface where organization reside. Higher the slope higher the return but higher the tendency to fall towards liquidation side.

Beside the external factor that effects organization there are some internal issues as well that leave organization in danger zone , to deal with internal  issues management use different tools like corporate governance and company policies. Company policy defines standard procedure to deal with unforeseen circumstances, and agency issues and other potential conflict of interest between stakeholders and management are dealt with Corporate Governance, company that does not have sound system of corporate governance in place is taking on major risk, means greater probability of organization to slip towards danger zone of liquidation side.


In Finance, risk management to return enhancement and company policies to corporate governance, are the art of Finance that how to keep the organization in safe zone(going concern) and this is the main idea to write this blog to describe as civil engineer ties a bridge in air,Financial engineers keeps trying to push the organization in safe side of this inclined surface where the upside is success and the down side is dead end (liquidation) of organization.

This is all about Financial Management.

3 comments:

  1. as if am reading financial management book. great post, boss. keep up ur good post!

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  2. You have attempted well to capture the surrounding forces of risks around the organization and other factors pulling the organization into the riskier belt. The story has been ended in a very nice and articulated way. Try to make the start also "catchy"! Keep up with your good work!And I will keep my fingers crossed for you :)

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  3. Thanks Mila and Sadaf for your encouragements :), Sadaf your feedbacks are welcome :), will surely try to follow it .

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