HomeHome SearchSearch MenuMenu Our productsOur products

Why did the 2008 Companies Act make liquidity tests compulsory?

by , 20 April 2015
The 2008 Companies Act (Co's Act) made liquidity tests compulsory to ensure companies are cash healthy before and after certain transactions.

But when do you have to perform theM/ Here's a checklist that shows four instances where liquidity tests are compulsory.

A company must perform a liquidity test before it:

- Provides financial assistance to people so they can buy the company's shares (Section 44 of the 2008 Co's Act);

- Makes loans to directors (Section 45 of the 2008Co's Act);

- Declares a dividend (Section 46 of the 2008 Co's Act);

- Merges with another company (Section 113 of the 2008 Co's Act).

Basically, the Act wants to avoid a situation where, for example, a company declares a dividend but after it pays the shareholders, it has no more money left to pay its water, lights, staff's salaries, etc.

 *********** High Rated Product ***************

For many South African companies, 2015 will be a time of fear as the threat of fraud, SARS audits and loan refusals escalates

Today, I'm going to show you how Jacquie conquered these threats

And how YOU can beat them too!

Click here for more
 
 ***************************************


When do you ACTUALLY need to perform a liquidity test?

Liquity tests show if your company will be able to meet all its debts after it provides the financial assistance to the director. If it can, then your company is liquid.

Example
Lucy Smith is a director of Lucy Smith Language Services (Pty) Ltd, which provides editing, writing, web design and translation services. The company's annual turnover is R1 million. Every November, Lucy buys 10 Christmas cakes from the local Girl Guide troop at R1 000 each.

This year, the leader of the troop came round when Lucy wasn't in the office. Anne, her PA, phoned her to ask what she should do. Lucy told her to take R10 000 out of petty cash to give to the girl guides and that she would replace it the next day. Technically, Lucy Smith Language Services (Pty) Ltd has provided their director with financial assistance.

To see if your company's liquid, do a cash flow forecast. Creating a cash flow forecast is really the only way you can see if your company's liquid and has enough cash to pay its day-to-day expenses.

Keep in mind that the financial statements don't show which assets can be readily turned into cash and at what cost, or when you can expect to get more cash. Only a cash flow forecast can tell you this.



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 >>>