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The important distinction between liquidity and solvency can sometimes be overlooked. Think back to the financial...

The important distinction between liquidity and solvency can sometimes be overlooked. Think back to the financial crisis of 2007-2008. How did these two concepts affect what happened to the U.S. (and World) economy during that time?

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Answer #1

Liquidity represent the availability of cash and cash equivalent on hand by an individual or an organisation. Company having high liquidity can operate smoothly and can make payment to current liabilities on time. Too much high liquidity is also not good, because it represent idle cash and inability to an organisation to utilise the fund.

Solvency: Generally when the asset of the individual or an organisation are higher than its liabilities they are called solvent. So the solvent company will definitely able to pay his liability (cash obligations), but if they are having liquidity crisis (non availability of cash and cash equivalent on hand) they will not be able to pay the liabilities on time.

  

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