What is Solvency?

Solvency is a company's ability to meet its long-term financial obligations. It is a measure of a company's financial health and its capacity to continue operating indefinitely. A solvent company has a positive net worth, meaning its total assets exceed its total liabilities.

For Startups: While startups often have negative net income, they must remain solvent to survive. Insolvency (the inability to pay debts) can lead to bankruptcy. Investors and lenders closely monitor solvency ratios like the Debt-to-Equity ratio to assess the long-term risk of the business. A virtual CFO helps in managing the capital structure to ensure the company maintains a healthy solvency position as it grows.

Distinction: Solvency is different from liquidity. A company can be illiquid (unable to meet short-term bills) but still be solvent if its long-term asset value is high. Conversely, a liquid company can be technically insolvent if its total liabilities exceed its total assets.