Difference Between Liquidity and Solvency

The differences between liquidity and solvency are related to the financial security of the company. While it is true that on many occasions these two definitions go hand in hand, it does not always have to be the case.

Liquidity is the quality that financial assets have to convert into money, and therefore, meet the most immediate payment commitments at an opportune moment. However, solvency is the ability of a company to make its payments and meet its financial debts, for this, it must have sufficient resources as support to meet the company's obligations. It is true that for a company to be liquid, it is necessary to have liquidity, but not every company that has liquidity is solvent since it can have cash on hand but have large financial debts with suppliers and banks.

Undoubtedly, every company seeks to have both variables in the best of conditions, it is a task of all companies and fundamentally of the management team, which is the one who makes the most important decisions within it. In turn, a lack of liquidity does not have to be synonymous with a lack of solvency since it may be that the company has payment peaks that do not have liquidity but it is paying its debts in order to repay them as soon as possible. possible.

Importance of liquidity and solvency in a company

Both variables are very important and in most cases they have to be accompanied by the proper functioning of the company, although it is true that solvency is very important for the stability of a business since there are ways to obtain liquidity in case of need it at a certain time and whose need is considered urgent.

Companies include liquidity ratios and solvency ratios in their financial models , in order to anticipate possible problems that may arise in this regard and that may be decisive and irreparable in the future. Many of these problems are a consequence of the lack of foresight and inaction of the managers of these companies, given that they do not take into account these two variables and their degree of importance for the proper functioning of the company.