What Is Insolvency?
Insolvency is a state of financial distress where a business is unable to pay its bills and often times will have to close.
This can happen due to factors such as:
A reduction in revenue
An increase in expenses
Poor cash management
Monitoring these areas is essential to prevent your business from becoming insolvent.
What Is Solvency?
In contrast, solvency means that a business has enough funds to cover its bills and financial obligations. A solvent company is financially stable and able to manage its cash flow effectively.
Dashboard Projections
In your projections, you'll encounter one of two outcomes:
Insolvent
Description:
The business ran out of money to pay its bills and became insolvent.Example Scenario:
In the scenario below, the business became insolvent after two months due to depleted cash reserves.
Solvent
Description:
The business maintained enough cash in the bank to continue paying its bills and remain operational.Example Scenario:
In this scenario, the business stayed solvent by managing its cash flow effectively, ensuring continued operation.
