Difference Between Liquidity And Solvency

Difference Between Liquidity And Solvency

The main dissimilarities or difference between liquidity and solvency can be pointed out as follows:

1. Introduction

Liquidity: It is availability of cash and liquid resources to cover current or short term liabilities of a firm

Solvency: It is long-term stability of a firm and ability to meet future long term liabilities.

2. What Is It?

Liquidity: Ability to fulfill short term needs

Solvency: Ability to fulfill future needs

3. Related To

Liquidity: It is related to cash and liquid assets

Solvency: It is related to cash, cash equivalent, and other types of assets

4. Risk Involved

Liquidity: Less risk is involved

Solvency: High degree of risk is involved

5. Obligations

Liquidity: It helps to meet short term obligations of business

Solvency: It helps to meet long-term or future obligations of business

6. Helpful In

Liquidity: To settle current liabilities

Solvency: To meet future debt and maintain good financial heath

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Difference Between Liquidity And Profitability

7. Ratios Used

Liquidity: Quick ratio, current ratio and acid test ratio are used to measure liquidity position of the firm

Solvency: Debt-to-equity ratio, debt-to-assets ratio etc. are used to measure solvency position of the firm.

Liquidity Vs Solvency (Comparison Chart)

Basis For Difference	Liquidity	Solvency
Introduction	Availability of liquid resources to cover current liabilities	Ability of a firm to meet long term liabilities.
It Is	Ability to fulfill short term needs	Ability to fulfill future needs
Related To	Cash and liquid assets	Cash equivalents and other assets
Risk Involved	Less	High
Obligations	Current	Long term
Helpful To	Settle current liabilities	To settle future debt
Ratio Used	Quick ratio, current ratio and acid test ratio	Debt-to-equity ratio and debt-to asset ratio

I hope this post is helpful to understand the difference between liquidity and solvency and to make comparison between them.