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Entering into a new transaction? Find out if your company needs to perform a liquidity test first!

by , 10 June 2013
The Companies Act requires you to perform a liquidity test before you enter into a number of transactions. If you don't, you could be fined anything up to R1 million. Read on to discover the four instances where your company has to perform liquidity test so you can avoid hefty fines.

You need to perform a liquidity test to see if your company will be able to meet all its debts after it after it's entered into certain transactions. If it can, then your company is liquid.

'The Companies Act made liquidity tests compulsory to ensure companies are cash healthy before and after certain transactions,' says the Practical Accountancy Loose Leaf.

And there are four instances where liquidity tests are compulsory: It's crucial that your company performs a liquidity test in these stipulated instances to avoid fines.

Here are the four instances where liquidity tests are compulsory

Your company must perform a liquidity test before it:

  1. Provides financial assistance to people so they can buy the company's shares.
  2. Makes loans to directors.
  3. Declares a dividend.
  4. Merges with another company.

Remember, the Act wants to avoid a situation where, for example, your company declares a dividend but after you pay your shareholders, you have no more money left to pay for water, lights and your staff's salaries.

Knowing which instances your company must perform a liquidity test for will ensure you comply with the Companies Act and avoid a fine of anything up to R1 million.
 

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