Home » Dictionary Articles »

YourDictionary defines financial solvency as the ability of a person, business or organization to meet all of its debts or financial obligations with some cash to spare.

Usage examples for this term include:

• Mr. Dobbs questioned the store’s financial solvency after he examined their books.
• Financial solvency is critical for long-term corporate sustainability.
• Attaining financial solvency prior to retirement makes it easier to live on a fixed income.

Business Solvency

In business terms, financial solvency means that the company can meets its long-term fixed expenses. Most companies seek financial solvency by trimming costs and improving earnings. Companies that are financially insolvent are heading towards bankruptcy or are already in bankruptcy proceedings.

Investors use numerous mathematical ratios to calculate the financial solvency of a business. These calculations create a picture of the business’ financial health. Ratios such as liquidity, debt, and earnings create the overall picture of financial solvency. The U.K. website includes a financial solvency calculator that can be helpful to estimate ratios for financial solvency.

Solvency and Profitability are Different

Financial solvency shouldn’t be confused with profitability. Companies can demonstrate financial solvency while being unprofitable. Companies can also be turning a nice profit and heading towards bankruptcy.

How can this happen? Picture this: a retailer purchases wholesale toys from China on credit terms with 60 days to pay its invoices for the toys after they arrive at the store. The retailer sells all the toys at a hefty profit, but instead of paying the bill for the first purchase, they spend the money on a lease for the store next to theirs, hoping the expansion increases business. Now, the toy retailer has no more cash on hand, long-term debt in the form of an extra lease, and bills to pay without the cash to pay them. They made a great profit by selling the toys, but because of poor business decisions, the firm does not demonstrate financial solvency.

Personal Solvency

Financial solvency means that an individual can pay all bills on time with cash to spare. Financially solvent people pay their bills each month from their checking or savings accounts, save some portion of their income, and typically have an emergency fund to cover the unexpected.