Solvency and the Balance Sheet

Maintaining positive balance sheet equity is crucial if a business is to stay solvent. The same applies to working capital.

Capital and Reserves

Of all the forecasts that Figurewizad produces the balance sheet describing the forecast financial position of your business is the most important.

Capital and reserves describe a company's equity which will always balance against total net assets. If equity goes into deficit there can be no question that a company is insolvent. In practice though insolvency rarely waits on negative equity.

Working Capital and Cash Flow Insolvency

Cash and cash convertibles such as accounts receivable and stock for resale realisable within twelve months (current assets) less all liabilities payable within twelve months (current liabilities) describes net current assets. A bank overdraft, which is repayable on demand is itself a current liability and therefore always a charge to net current assets.

This is the working capital of the business which broadly describes liquidity without which cash flow to be generated by a company through core trading activity is impossible.

In the short term only, long term debt or increased paid up share capital will temporarily eliminate a working capital deficit. To effectively solve the problem for the longer term though cutting back on expenditure on overheads is the usual remedy.

Run Out of Cash and Go Out of Business

A positive balance sheet is no defence against cash flow insolvency therefore. If the working capital of a company is in deficit the time must come when it is unable to generate sufficient cash to pay its bills on time. That's when the process of insolvecy starts to kick in.

Planning Liquidity and Solvency

Successfully keeping a business's cash flow postive depends on forecasting to plan and budget for the year or years ahead. This is what Figurewizard does but however you go about it; do it you must.

The links below will take you to interactive working examples of the key liquidity and cash flow forecasts we produce simply using your estimated figures for sales, margins, overheads and investment - Essential for planning solvency as well as for ensuring profitability.

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