What is solvency in finance

An entity has a good level of solvency when from the economic point of view it can offer a timely response to payments. This concept not only has meaning at the corporate level, but also from the point of personal or family economy. It is the proactive capacity to assume the present and future economic commitments through an optimal planning of this issue.

 

Response to the commitments assumed

The solvency transcends the economic level of cash since equity is also a security support for those who own it. It is positive that a person or an entity can know their solvency level to establish an objective forecast from their present situation. For example, this purpose is especially important in relation to savings and other financial decisions contextualized in the time frame.

 

Through this capacity to respond, the person can not only prevent the risk of possible indebtedness, but also react positively to the same in case of contracting some type of debt. The subject that is solvent has the capacity to respond in the indicated time periods before those financial issues with which it has a duty.

 

The solvency level can also be linked to the timeframe. The goal of a company or a person is to be solvent in the medium and long term. You can visualize this temporal reference from the expectation of evolution and the fulfillment of goals that are aligned with this motivation.

 

 

Relation between income and expenses

One of the premises that can be applied to solvency is the continuous relationship between the level of income and expenses. When there is a benefit in this equation, this variable is positive in itself. In essence, there must be a relationship of harmony between the figures grouped in expenses and income.

 

Although external circumstances also condition the reality of an entity, strengthening the solvency level is a proactive search by a company that makes decisions and puts them into practice by connecting with the essence of this motivation. Being able to prove the level of solvency is also important in different situations, for example, at the time when a subject wishes to request a loan, the granting of the loan will depend, among other factors, on this issue. This indicator provides information on the situation of those who contract this agreement to fulfill their responsibility with the obligations derived from it.

While an optimal level of solvency puts an entity in a favorable situation of prosperity, the opposite circumstance sustained over time can produce the opposite effect of the risk of closure due to the difficulty of managing all commitments made with third parties.

How to increase economic solvency

  1. Financial planning. Specify an action plan aligned with the goal of a realistic end.
  2. Control of fixed and variable expenses.
  3. Identify what are the indicators of your desired status in terms of solvency and decide what you are going to do to get there.

 

Leave a Comment