How to Calculate and Forecast Cash Flow After Dividends

Reward for Enterprise

When declaring a year end dividend and when to pay it most SME s must first establish what it will do to liquidity, cash flow and solvency. Working with Figurewizard this calculator enables you to plan what will be sustainable.

Diidends cannot be declared on the expectation of profits alone no matter how reasonable that expectation may be. The profits have to be indisputably present in the company's balance sheet beforehand.

Using the What-If Calculator for Liquidity and Cash Flow.

You should always be careful when declaring dividends. For example if Figurewizard's dividend calculator tells you that for some months' the bank plus undrawn and available finance will be returning deficits, action must be taken to eliminate them.

Apart from changing the value of dividends you have three options to resolve forecast cash flow deficits; budgeting, financing or both. For financing you can update the bank overdraft and / or select factoring on this page but for more comprehensive planning Figurewizard makes it possible to plan with all three using the unique Interactive What-If Calculator. What follows describes how to do this.

The What-If calculator allows you to change youur original forecast values for profit margins, overheads, investment and all kinds of financing including bank overdraft, fixed term loans, asset finance and factoring / supply chain financing.

The key result when you are making changes will be "Min Bank and Undrawn Financing" under "Cash Bank and Solvency". Your target will be to see that is greater than zero. If your changes can't do that and you have no other options then you must reconsider the size of the dividend.

How the Dividend Calculator's Figures are Produced

Using Figurewizard, the first step is to produce a full set of forecasts. That is actually a lot simpler than it sounds.

The forecasts are produced from nothing more than a user's own forecast figures for for sales, margins, overheads, financial arrangements and investments. Entering those figures will be a matter of minutes.

That is all our system needs because it then does all of the work to produce the forcasts, including calculating and applying VAT, capital allowances and corporation tax. No further input is called for from a user.

This calculator and all of the sample forecasts on this site are working examples, based on a single set of such figures.

Dividends as a Current Liability

A dividend is charged as a current liability to the balance sheet from the day it is declared.

As a result working capital (net current assets) is reduced by the value of the dividend on the date of declaration, not on the date payable which may be sometime in the future. Similarly a shareholder's liability for personal tax on a dividend arises from the date of declaration not the date of payment.

Dividends and Director's Responsibilities

Great care should always be exercised when declaring dividends. Forecasting and planning their consequences on the future financial position of the business is important to avoid possible breaches of company law.

Under section 174 (1) of the Companies act directors have a stautory duty to exercise reasonable "care, skill and diligence". Declaring dividends that put future cash flow solvecy at risk is a classic example of not exercising care, skill and diligence.

In the event of a company becoming insolvent it becomes possible for directors' responsibilities under the Companies act to change. If insolvency remains unaddressed those responsibilities shift to acting in the best interests of creditors under the Insolvency act.

In the event of the company failing there might then be a risk of personal liabilty for part or in extreme cases even all creditor claims regardless of limited liability. Ignorance of the law is no defence.

Legal and Illegal Dividends

The Companies act 2006 sec. 830 (1) states: A company may only make a distribution out of "profits available for the purpose". That means retained profits as recognised in the balance sheet.

Dividends that fail to comply with this requirement are deemed to be illegal and their declaration as "ultra virus" meaning that by declaring them directors have acted beyond their powers. That would result either in an order to repay the dividend or for its value to be assigned to directors' loan accounts and subject to a corporation tax charge.

HMRC's options don't stop there though as it is also possible for them to take the view that illegal dividends should be treated as salary, making them chargeable for both income tax and NI plus employer's contribution for NI.

Forecasting the Consequences of Dividends

Despite all of the above, the process of declaring dividends is not really a minefield as long as at the time of declaration their consequences on future liquidity and cash flows have been taken into account and resolved if need be.

That is what this dividend forecaster and the What-If Calculator are for and why they are recommended to you and your advisors.