A major customer confirms that it will not renew its contract. The current year’s accounts may still show healthy revenue, a profit and sufficient cash. Management may also expect replacement business to arrive before the existing contract ends. However, the financial outlook has changed, and the assumptions supporting earlier forecasts need to be reconsidered.
For statutory audits, the question extends beyond how much revenue will disappear. Auditors need to understand how the loss affects management’s financial reporting assessments, including going concern, asset recoverability and relevant disclosures. A forecast prepared before the customer’s decision may no longer provide a reliable basis for those judgements.
For directors preparing for an audit with Lee & Hew, the practical starting point is a documented explanation of what has changed, how management has assessed the consequences and which evidence supports its response.
Establish What the Customer Has Actually Confirmed
Before changing the forecast, establish the facts. A written non-renewal notice carries different implications from an informal warning that the customer is considering other suppliers. The remaining contract period, termination provisions, minimum purchase commitments and outstanding orders all affect the expected financial impact.
Finance should obtain the relevant contract, correspondence and internal account updates. If the customer will continue placing orders during a transition, the forecast should reflect the agreed arrangements. Assuming that historical monthly sales will continue until the final contract date may be inappropriate where orders are already declining.
The assessment should also distinguish between losing a customer entirely and losing one product line, location or service agreement. A precise description of the change helps management avoid overstating or understating its exposure.
Rebuild the Forecast From a Reconciled Starting Position
A forecast is difficult to assess when its opening figures cannot be connected to the accounts. Start with reconciled cash, receivables, payables, borrowings and other significant balances. Explain any differences between the latest management accounts and the figures used in the model.
The departing customer’s outstanding invoices deserve particular attention. Separate amounts already collected from those still awaiting payment, disputed balances and amounts subject to retention or final acceptance. A customer’s decision not to renew does not automatically make existing receivables uncollectible, but the expected timing and amount of collection still require support.
Maintain a clear distinction between existing receivables and revenue expected from future work. Otherwise, the same receipt can appear twice, once as collection of an opening debtor balance and again within projected sales receipts. That error can make the business appear better funded than it is.
Measure the Contribution Lost, Not Just the Revenue
Removing the customer’s sales from a budget is only the beginning. Management also needs to identify the costs that will disappear, those that will continue and those that may arise because the relationship ends.
Materials purchased specifically for the contract may reduce quickly. Dedicated employees, premises, equipment leases and support functions may remain. Some resources might be redeployed, but that assumption needs an operational plan rather than a general statement that capacity will be used elsewhere.
For example, losing S$200,000 of monthly revenue does not necessarily reduce monthly cash generation by the same amount. If S$130,000 of associated payments genuinely stop, the initial reduction is S$70,000 before other changes. However, if those savings take three months to implement, the near-term cash pressure could be substantially greater. The forecast should show that transition explicitly.
Separate Replacement Business From Sales Ambitions
Management may have credible reasons to expect new customers. Nevertheless, a sales target, a proposal and an executed contract provide different levels of support for a forecast.
Review the replacement pipeline by stage, expected commencement date, delivery capacity and payment terms. A signed contract can still require expenditure before collections begin. Recruitment, stock purchases, installation work and customer credit may increase funding needs even where replacement revenue restores the projected profit.
Avoid treating an entire pipeline as certain revenue simply because its total value exceeds the departing contract. Document the basis for conversion assumptions and compare them with previous experience. Where management expects unusually strong conversion, explain what has changed and identify the evidence supporting that expectation.
Show When Cash Pressure Develops
An annual forecast can conceal a serious shortfall within the year. A company may finish the forecast period with a positive cash balance while being unable to meet payments several months earlier.
Consider a simplified illustration. A business starts with S$240,000 of available cash. After allowing for expected customer collections, operating payments, tax and scheduled debt repayments, it forecasts a net cash outflow of S$45,000 per month for six months. Without additional funding or changes to those assumptions, its closing balance would be negative S$30,000.
If management requires a minimum operating balance of S$60,000, the practical pressure begins earlier. That buffer is reached after four months. A forecast that assumes new business starts in month six therefore needs to explain how the company will fund the intervening period. A positive result later does not resolve an earlier payment shortfall.
Test Assumptions Against a Credible Downside
A base case should represent management’s supported expectations. It should also be accompanied by analysis of what happens if important assumptions are not achieved.
Useful scenarios might include replacement work starting later, a final customer payment being delayed or planned cost reductions taking longer. Select scenarios that reflect the company’s actual exposure. Applying an arbitrary percentage reduction to every forecast line may miss the particular events that would create difficulty.
Management should identify which assumptions have the greatest effect on available cash and when action becomes necessary. A scenario is more useful when it leads to a specific response, such as securing funding before a stated date, than when it simply produces another spreadsheet. Keep the assumptions consistent so that readers can understand why the outcome changes.
Support Financing Assumptions With Evidence
An unused facility shown in a spreadsheet is not necessarily available throughout the forecast period. Review its expiry, drawdown conditions, financial covenants and any restrictions relevant to the loss of the customer.
Where the forecast depends on refinancing, distinguish an approved arrangement from an application or preliminary discussion. Similarly, a shareholder’s willingness to provide support should be considered alongside their financial capacity and the terms and timing of the proposed funding.
The evidence file might include facility agreements, lender correspondence and documented shareholder commitments. Management should also explain whether the same funding has been promised elsewhere within the group. Resources cannot support several companies simultaneously unless the provider has sufficient capacity. These details help turn a general assurance of support into an assumption that can be assessed.
Connect the Forecast to Going Concern
Losing a significant customer can raise questions about the company’s ability to continue operating, but it does not automatically mean the going concern basis is inappropriate. The assessment depends on the overall circumstances, including liquidity, other customers, financing and feasible management actions.
Management is responsible for preparing its assessment. In statutory audits, the auditor evaluates the relevant evidence and considers the consequences for the financial statements and auditor’s report. A forecast is therefore part of the assessment, rather than a substitute for a documented conclusion.
Use the assessment period required by the applicable reporting framework and auditing requirements, and consider relevant known events beyond it. Explain significant uncertainty openly. An audit opinion does not guarantee the company’s future viability, and the loss of a customer does not automatically require a modified opinion.
Consider Whether Asset Values Remain Supported
The departing contract may have supported specialised machinery, customer-specific systems or other assets whose expected benefits have now changed. Management should consider whether the circumstances indicate that an impairment assessment is needed.
This does not mean writing off every asset associated with the customer. Equipment may be redeployed or sold, and a wider operation may continue generating cash. The assessment needs to follow the applicable requirements for the asset or cash-generating unit concerned.
A company-wide cash forecast should not be copied unchanged into an impairment calculation. The purpose, scope and measurement assumptions may differ. Document how the revised business outlook affects the relevant asset assessment and reconcile significant differences between models. Contradictory assumptions, such as excluding replacement work from one model while assuming immediate replacement elsewhere, require explanation.
Assess the Timing of the Non-Renewal
The date management receives the notice matters, particularly when it falls after the reporting date but before the financial statements are authorised.
Under the applicable subsequent-events requirements, consider whether the information provides evidence of conditions existing at the reporting date or relates to conditions arising afterwards. That distinction affects whether amounts are adjusted or whether disclosure of a material non-adjusting event is required. A notice received after year-end is not automatically an adjusting event.
The going concern implications also need separate attention. Information obtained after year-end can affect whether the going concern basis remains appropriate. Keep a chronology of negotiations, customer communications and management decisions so that the assessment rests on the circumstances, rather than the notice date alone.
Make Management’s Response Specific and Achievable
Forecasts often include savings labelled “restructuring”, “efficiency improvements” or “management action”. Those descriptions provide little evidence of when the cash benefit will occur.
Identify the action, responsible person, approval status, implementation date and associated expenditure. Reducing warehouse space may require notice and reinstatement costs. Selling equipment may require a buyer and lender consent. Changes to staffing may involve commitments that prevent immediate savings.
Separate the business response from its accounting treatment. A planned action does not automatically create a liability, and expected future operating losses are not simply recorded as a provision. Management should assess each relevant item under the applicable requirements while ensuring that the cash forecast reflects realistic payment timing.
Prepare a Clear Forecast Evidence Pack
A useful audit pack brings together the customer notice, relevant agreements, reconciled opening balances, forecast assumptions, scenario analysis and supporting financing documents. It should also contain management’s conclusions and evidence of the directors’ review.
Version control matters. Preserve the forecast originally approved and explain subsequent revisions. Compare actual performance with earlier expectations, identifying whether differences arose from collection delays, sales assumptions, cost overruns or implementation problems. This helps distinguish an updated assessment from a model repeatedly changed to maintain a preferred outcome.
For a statutory audit engagement with Lee & Hew, organising this evidence early can make discussions about significant judgements more focused. Management should retain responsibility for its assumptions and decisions, with clear explanations available for independent examination.
Bring the Financial Reporting Assessment Up to Date
A major customer’s departure creates connected questions about future cash, asset values, commitments and disclosures. Addressing each question separately without a consistent view of the business can produce conflicting conclusions.
Directors should ensure that the final assessment reflects information available up to the relevant approval stage. If replacement sales disappoint or financing discussions change during the audit, update the analysis and explain the effect. Board minutes should record the reasoning behind significant decisions, rather than simply noting that a forecast was reviewed.
Companies preparing for statutory audits can discuss the relevant records and reporting timetable with Lee & Hew before the financial statements are finalised. The objective is a coherent, evidence-based account of the changed outlook, the actions management can realistically take and the uncertainty that remains.