April 14, 2017

Liquidity, Solvency and Profitability - The Finance Challenge

Liquidity, Solvency, and Profitability are issues that are presented in the management report to share holders as a part of annual report of the company to shareholders.

Liquidity and solvency are discussed as part of the risk management of the company. The company has to be liquid so that it can pay creditors when the payment is due. Solvency is the condition where assets of the company are more than its liabilities. Top management has to do go through forward plans of the company to make sure its strategy does not create liquidity and solvency risks for the company. Many times low profits made by a company during the financial periods create these problems. Of course solvency risk comes because of losses sustained by a company in one or more new projects or the deterioration of existing business into losses.


Cash is king. Capital is queen. Without liquidity, the ability to pay to creditors, suppliers, employees, government promised payments when they become due, business comes to standstill. Liquidity planning has to be done by the company and top management has to make sure that the plan provides adequate liquidity for the next 12 months. It may be even a rolling plan. Top managers have to   understand  each inflow and outflow of the liquidity plan and have to satisfy themselves that those inflows and outflows are plausible and sufficient for the liquidity needs of the organization.

Solvency is the condition that equity capital is there in the company to support debt. When companies enter loss making phases, the equity may go on reducing and sometimes result in zero equity. The creditors can ask for the winding up of the company. Top managers have to take care of the five year plans of the company to make sure that the company will be solvent.

Profit is the reason why the company is in business. Top managers approve a business investment only there is adequate return. But approval implies complete conviction in the plan and the expected results have to come in the future periods. Top managers when they approve the business plans and budgets carry a burden to check the feasibility of them from all angles.

This article is part of #AtoZChallenge 2017 for Blogging Posts. My Theme for the Challenge is Top Management Challenges - Full List of Articles  http://nraomtr.blogspot.com/2016/12/a-to-z-2017-blogging-challenge-top.html

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