Understanding Solvency
Solvency is all about knowing if your business has a strong financial foundation. It compares what you own (your assets) to what you owe (your debts). Having more assets means you rely less on borrowing. The solvency ratio also helps you see if your business can keep up with its long-term payments. Planning to invest but lack the funds? Banks will definitely want to see your solvency ratio. Remember, accurate balance sheet figures are crucial for a correct solvency calculation.
Calculating Your Business’s Solvency
You can figure out your company’s solvency in three main ways, resulting in what’s known as a solvency ratio or percentage. It all starts with your balance sheet.
- Assets vs. Debts Add up all assets on the left side of your balance sheet and all debts on the right side. Divide your total assets by your total debts and multiply by 100 to find your solvency percentage.
- Equity vs. Debts This shows how much bigger your equity (what you truly own) is compared to your debts.
- Equity vs. Total Assets This tells you what portion of your total assets is actually funded by your own money.
A good solvency ratio typically ranges between 25% to 40% for the third calculation, meaning your business is financially healthy.
Why Calculating Solvency Matters
Making Your Business Stronger
Calculating your business’s solvency is smart. It helps you understand your financial health and guides you in making better business decisions. ACE can not only calculate your solvency but also offer advice to improve it. This might involve keeping more profits within the company, reducing inventory for better cash flow, or converting some assets into cash to pay off debts.
Additional Financial Health Checks
ACE also helps with:
- Checking how easily you can turn assets into cash (liquidity)
- Understanding how profitable your business is (profitability)
Get Expert Advice
Thinking about mapping or enhancing your business’s financial health? The ACE team is here to help with personalised advice and strategies. Get in touch to explore solutions tailored to your business needs.
