Financial Health in Organizations: Solvency

Posted by Matthew Thomas

Solvency is a significant measure of an organization’s financial health. No matter what the type of business, solvency factors in to an organization’s capacity to carry out its mission and purpose. Solvency is an issue for non-profits and churches as well as businesses and corporations.

matthew-thomas-2Solvency is determined by two basic tests:

  1. Balance sheet: a solvent balance sheet has assets that exceed liabilities.
  2. Cash Flow (Liquidity): cash flow is solvent when obligations can be met in the normal course of business.

Organizations that cannot meet one or both of those tests are considered insolvent. Insolvent enterprises often face added legal responsibilities to creditors (not just shareholders or members) in many jurisdictions.

Many organizations operate in or around this “Zone of Insolvency”, adding financial stress to the development of mission and purpose. In the business world, insolvency cuts into profits, since credit is more expensive and opportunities for growth take second place to managing financial emergencies. In the non-profit and church world, insolvency causes paycheck-to-paycheck living that distresses mission, staff, and donors, and additionally tends to create deferred-maintenance policies for fixed assets such as real estate and significant equipment.

There are a variety of approaches to dealing with solvency, which we will cover in future posts:

  • Healthy Levels of Reserves
  • Debt Management
  • Balance of Liquid vs. Non-Liquid Assets
  • Revenue/Expense Balance
  • Mindsets and Paradigms

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Topics: Matthew Thomas, organizational decision making, Debt, Financial Health,, Solvency,