BUSINESS FINANCE BANKING EDUCATION GENERAL LAW

SCIENCE IT

Dierence Between Liquidity and Solvency

October25,2016BySurbhiS LeaveaComment

Atthetimeofmakinganinvestment,inanycompany,oneofthemajorconcernsof
alltheinvestorsistoknowitsliquidityandsolvency.Thesearethetwoparameter
whichdecideswhethertheinvestmentwillbebeneficialornot.Thisisbecause
thesearerelatedmeasuresandhelpstheinvestorstoexaminethefinancialhealth
andpositioncarefully.
 BallMillZoneDing
MostProfessionalBallMill
manufacturerinChina,Best
price&Service,Contact!

Manypeoplejuxtaposeliquidityforsolvency,butthereexistafinelineof
differencebetweenthesetwo.Whileliquidityishoweffectivelythefirmisableto
coveritscurrentliabilities,throughcurrentassets.Solvencydetermineshowwell
thecompanymaintainsitsoperationinthelongrun.So,takeaglanceatthearticle
providedtoyou,tohaveaclearunderstandingonthetwo.

Content: Liquidity Vs Solvency

1.ComparisonChart
2.Definition
3.KeyDifferences
4.Conclusion

Comparison Chart

BASISFOR
LIQUIDITY SOLVENCY
COMPARISON

Meaning Liquidityimpliesthe Solvencymeansthefirm's

measureoftheabilityof abilityofabusinesstohave
thefirmtocoverits sufficientassetstomeetits
immediatefinancial debtsastheyfallduefor
obligations. payment.

Obligations Shortterm Longterm

Describes Howeasilytheassetscan Howwellthefirmsustainitself

beconvertedintocash. forlongtime.
 BASISFOR
LIQUIDITY SOLVENCY
COMPARISON

Ratio Currentratio,acidtest Debttoequityratio,interest

ratio,quickratio,etc. coverageratio,etc.

Risk Low High

Denition of Liquidity
Wedefineliquidityasthefirmsabilitytofulfilitsobligationsintheshortrun,
normallyoneyear.Itistheneartermsolvencyofthefirm,i.e.topayitscurrent
liabilities.

Itmeasurestheextenttowhichthefirmcanmeettheirfinancialobligations,as
theyfalldueforpayment,withtheassetslikestock,cash,marketablesecurities,
certificateofdeposits,savingsbonds,etc.availabletothem.Cashisthehighly
liquidasset,asitcanbeeasilyandquicklyturnedintoanyotherasset.

Whenafirmisunabletopayoffitsshorttermobligations,itdirectlyaffectsthe
firmscredibility,andifthedefaultinthepaymentofdebtcontinues,thenthe
commercialbankruptcyoccurs,duetowhichthechancesofsicknessand
dissolutionwillbeincreased.Therefore,theliquiditypositionofthefirmhelpsthe
investorstoknowwhethertheirfinancialstakeissecuredornot.

Denition of Solvency
Solvencyisdefinedasthefirmspotentialtocarryonbusinessactivitiesinthe
foreseeablefuture,soastoexpandandgrow.Itisthemeasureofthecompanys
capabilitytofulfilitslongtermfinancialobligationswhentheyfallduefor
payment.

Solvencystressesonwhetherassetsofthecompanyaregreaterthanitsliabilities.
Assetsaretheresourcesownedbytheenterprisewhileliabilitiesaretheobligations
whichareowedbythecompany.Itisthefirmsfinancialsoundnesswhichcanbe
reflectedontheBalanceSheetofthefirm.

Lackofsolvencyinthebusiness,maybecomethecauseforitsliquidation,asits
directlyaffectsthefirmsdaytodayoperationsandthustherevenue.

Key Dierences Between Liquidity and Solvency

Thepointsgivenbelowdescribesthedifferencebetweenliquidityand
solvencyindetail:

1.Liquidity,meansistogetmoneyatthetimeofneed,i.e.itisthe
companysabilitytocoveritsfinancialobligationsintheshortrun.
Solvencyreferstothefirmsabilityofabusinesstohaveenoughassets
tomeetitsdebtsastheybecomedueforpayment.

2.Liquidityisthefirmspotentialtodischargeitsshorttermliabilities.
Ontheotherhand,solvencyisthereadinessoffirmtoclearitslong
termdebts.

3.Liquidityishoweasilytheassetscanbeconvertedintocash.
Conversely,solvencyishowwellthefirmsustainsitselfforalongtime.

4.Theratioswhichmeasurefirmsliquidityareknownasliquidityratios,
whicharecurrentratio,acidtestratio,quickratio,etc.Asagainstthis,
thesolvencyofthefirmisdeterminedbysolvencyratios,suchasdebt
toequityratio,interestcoverageratio,fixedassettonetworthratio.

5.Liquidityriskcanaffectthecompanyscreditworthiness.Unlike,
solvencyriskcanleadthecompanytobankruptcy.

Conclusion
Bothliquidityandsolvencyhelptheinvestorstoknowwhetherthecompanyis
capableofcoveringitsfinancialobligationsornot,promptly.Investorscanidentify
thecompanysliquidityandsolvencyposition,withthehelpofliquidityand
solvencyratios.Theseratiosareusedinthecreditanalysisofthefirmbycreditors,
suppliersandbanks.

CIPS Procurement Master

Study a CIPS Accredited Procurement
Mgmt Master. Scholarships, DL Study
are Available.

You Might Also Like:

DifferenceBetween DifferenceBetween DifferenceBetween

AssetsandLiabilities FixedCapitaland CapitalStructureand
WorkingCapital FinancialStructure

DifferenceBetween DifferenceBetween DifferenceBetween

BalanceSheetandProfit BookValueandMarket BalanceSheetand
&LossAccount Value FinancialStatement

FiledUnder:Business

Leave a Reply
Youremailaddresswillnotbepublished.Requiredfieldsaremarked*