HomeHome SearchSearch MenuMenu Our productsOur products

What you NEED to know about solvency and liquidity tests

by , 31 January 2014
You're required to do solvency and liquidity tests. This is a legal requirement by the Companies Act. Continue reading as we tell you everything you need to know about solvency and liquidity tests.

Solvency and liquidity tests are compulsory.

Why?

This is to ensure your company is cash healthy before and after making certain transactions.

You'll be required to do solvency and liquidity tests when doing the following the following activities:

  • Provide financial assistance to people so they can buy your company's shares
  • Makes loans to directors
  • Declares a dividend

That's not all.

You'll also have to do a liquidity test when there's a merger.

The solvency and liquidity test will help determine whether or not your company's liquid.

What does liquidity mean?

Your company's liquid if it can pay its debts when they're due.

You'll have to do a cash flow forecast to see if your company's liquid.

The Practical Accountancy Loose Leaf defines a cash flow forecast as an estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year).

A cash flow forecast will show you, for instance, if you need to borrow any money, how much you need to borrow and when and how you'll repay the loan.

The Small Business Development Corporation says by including every case scenario in your cash flow forecast you'll see how your business will cope if it hits tough times or does better than expected.

'Prior warning allows you to work out solutions to anticipated temporary cash shortfalls or arrange short-term investments for temporary cash flow surpluses.'

Now that we've told you about solvency and liquidity tests, use these three tips to ensure your solvency and liquidity tests are accurate.

Enjoyed this article? Subscribe to receive these free articles in your inbox daily.



Related articles




Related articles



Related Products



Comments
0 comments


Recommended for You 

  Quick Tax Solutions for Busy Taxpayers – 35 tax answers at a glance



Here are all the most interesting, thought-provoking and common tax questions
asked by our subscribers over the last tax year – everything from A to Z!

To download Quick Tax Solutions for Busy Taxpayers – 35 tax answers at a glance click here now >>>
  Employees always sick? How to stop it today



Make sure you develop a leave policy to regulate sick leave in your company.

BONUS! You'll find an example of the leave policy and procedure in this report.

To download Employees always sick? How to stop it today click here now >>>
  Absenteeism: Little known ways to reduce absenteeism



This FREE e-report will tell you how you can reduce absenteeism in your workplace while avoiding the CCMA and without infringing your employees' labour rights.

To download Absenteeism: Little known ways to reduce absenteeism click here now >>>
  7 Health & safety strategies to save you thousands



Don't let a health and safety incident cost you one more cent. Implement these seven
strategies in your company today.

To download 7 Health & safety strategies to save you thousands click here now >>>