Cash flow insolvent

From ACT Wiki
Revision as of 14:38, 20 August 2020 by Doug Williamson (Talk | contribs) (Classify page.)

(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)
Jump to: navigation, search

An entity is 'cash flow insolvent' when its cash flows and liquid assets, supported by any additional sources of liquidity, are inadequate for it to pay its debts as they fall due.

In the non-financial sector, this is sometimes known as 'commercial' insolvency.


Cash flow insolvency is contrasted with 'balance sheet insolvency', which usually relates to accumulated losses and negative equity.


It is possible for profitable businesses to be cash flow insolvent, for example as a result of 'overtrading' and poor cash forecasting and management.


Banking

Banks generally fund longer term assets with contractually shorter term - but stable - liabilities, including customers' deposits.

The cash flow solvency of banks depends on the repeated rolling over - or replacement - of their shorter term liabilities, including deposits.


See also