To determine the financial condition of an enterprise, a huge number of indicators are used, associated with different areas of its activities. The final characteristics are liquidity and solvency, which, although they reflect the real state of affairs at the enterprise, still carry different meanings. To understand what their difference is, it is necessary to identify the essence that they mean by themselves.
Liquidity - the ability of the assets available at the enterprise to quickly turn into cash, that is, they must be sold as soon as possible, and their sale price should be approximately equal to or higher than the market value. In this regard, according to the degree of speed of turnover in money, several types of assets are distinguished - illiquid, low-liquid, medium-liquid and highly liquid.
Solvency means the ability of an enterprise to pay off its debts and obligations at the expense of its available funds. If the company's solvency indicator is at a sufficiently high level, we can say that it is financially stable, that is, it has a low probability of going bankrupt.
The concept of liquidity refers to the assets of an enterprise, since only they can turn into cash, while liabilities do not have a similar characteristic. Liquidity has a certain range of values, according to which assets are related to one or another level of this indicator.
Solvency is associated with both assets and liabilities, since it is defined as the ratio between these two balance sheet items. If an enterprise has a large stock of highly liquid assets, then it is able to pay off its obligations, which indicates a high level of the company's solvency. Simply put, solvency directly depends on the degree of liquidity a particular asset of the company has.
- Solvency is a broader indicator that depends on the level of liquidity of the enterprise.
- The liquidity of assets has several levels, while the solvency fluctuates only within a certain range.
- Liquidity refers to the assets of the balance sheet, and both assets and liabilities of the enterprise are used to calculate solvency.