A lot of people tend to focus on the liquidity ratio, when determining whether a company is solvent or not. It’s psychologically very weighty.
Liquidity ratio = current assets / current liabilities
But this can cloud judgment.
Imagine you need to prove the company’s solvency because it is facing a court ordered wind-up, and the liquidity ratio comes out at 0.99 (meaning CL exceeds CA).
Psychologically, the 0.99 carries weight, and it can take a lot of ‘work’ to show why this is not conclusive.
Rather, proving solvency is a culmination of many different factors and indicators.
Maybe the easier way, practically speaking, is to take stock whenever you are genuinely concerned (like sleepless nights or high stress) about how you will find the cash flow to pay a creditor.
Regularly check your cash flow reports and speak to your accountant if you start getting concerned.
#insolvency #directorduties #svvoidables
