Question

Although both are important, but, in a bad scenario, is it better to have solvency than liquidity?

Answer 1

Lets understand first what is mean by solvency and liquidity before the commenting that in bad seenario, it is better to have solvency than liquidity.

Liquidity:- It means  ability to quickly access cash and near-cash assets to satisfy current debt service and operations.

It required to pay day to day expenses ,short term payment, monthly regulary payment.

solvency:- It means  strong balance sheet with manageable debt ratios, leverage, and risk that is low enough to maintain access to ongoing funds should the need arise.

Solvency refer to positive cash flow having adaquate liquidity of cash to pay future short term, long term and any other liability arises in the future.

By considering following points is consider solvency is better than liquidity.

:- Solvency think the long term prospective and liquidity think the short term period.

:- In long term period solvency generate smooth cash flow and pay off its liability.But in liquidity there is no assurance of ability to future liability.

:- Liquidity in short term period may due to realisation from sale of fixed assets which generate the cash flow but these event are not normally happened in companies life so it is better to have solvency than liquidity.

:- Solvency is good sign for operating cycle it means your cutomer are pay you on timely basis and you have paid it to creditors so there is no need to take external debts. In liquidity position it not happen regular as excess cash in periiod may not guranteed available in future period.

After considring above point is say that solvency is better than liquidity.