Financial Health

Solvency or liquidity, which is best?

Well it depends on your objective but overall we vouch for solvency overall, here is the difference:

1.       Solvency: Solvency is the ability of a company to meet its long-term debts (long term being more than 12 months) and other financial obligations.

2.       Liquidity: Liquidity refers to the ease with which an asset, or security, can be converted into cash.

Cash is king remains a true proverb; this is the reason why you are able to pay your staff, rent and other ops costs but let’s talk about this a little more.

Being solvent means even if the business were to shut down tomorrow for whatever reason, all your debts and financial commitments would be settled using the company’s assets.  You may be the sole director but the company is a separate juristic person and should be able to handle it’s own debts. On the other hand, being liquid means you can pay your rent and buy trading stock to keep operations going on in the near future using current assets that are easily convertible into cash; i.e. not selling fixed assets (e.g. company car) to do so.

Before you sign that contract for a new house or a new car, take time to consider this and evaluate your financials; your lender will ask you for annual financial statements for this same reason to determine what you can afford. If anything choose to be liquid and solvent.