What is Cash-flow Insolvency?

Cash-flow insolvency occurs when an individual or a business is unable to meet its current financial obligations as they come due because of a lack of sufficient cash or liquid assets. This type of insolvency is primarily a short-term issue, as it focuses on the entity’s ability to generate enough cash to cover immediate expenses and liabilities.

Cash-flow insolvency can arise from various factors, such as a temporary decline in revenue, unanticipated expenses, poor cash management, or external factors like an economic downturn or market disruption. In some cases, cash-flow insolvency may be a temporary situation that can be resolved through cost-cutting measures, obtaining short-term financing, or improving cash management practices.

It’s important to note that cash-flow insolvency is different from balance sheet insolvency, which occurs when an entity’s total liabilities exceed its total assets. An entity can experience cash-flow insolvency without being balance sheet insolvent, and vice versa.

If cash-flow insolvency is not addressed and resolved, it can lead to more serious financial problems and potentially result in bankruptcy or liquidation for businesses, or personal bankruptcy for individuals. Therefore, it’s crucial to identify and address cash-flow issues as early as possible to prevent further financial distress.