What is solvency?

Your company's solvency is the ratio of equity to total assets. Equity includes assets (assets) minus debts (liabilities). The higher your equity, the better it is for your company.

Calculate solvency

Now, of course, you want the check your company's solvency. You can easily do this yourself, use the following calculation:

(equity/total assets) x 100% = solvency ratio.

You get the amounts of both equity and total assets from the balance sheet of your financial statements. By checking this regularly, you will get a faster insight into the financial situation of your company.

Solvency calculation example

You have a total assets of €225,000 and an equity of €75,000. Then the solvency ratio is (75,000/225,000) x 100 = 28

What is good solvency?

The following applies here: the higher, the better, but a solvency of 25 is good. This also depends on the industry. Each industry has its own characteristics that can influence the financial picture. So a good solvency ratio is often between 25 and 40, which means that 25% to 40% of your company is financed with your own money.

A good ratio is important, especially important for business partners, lenders and investors. It shows whether your company is creditworthy. Lenders, for example, look at equity and what remains after a bankruptcy. Based on this, they determine the risk level and associated costs.

How can you improve it?

There are a number of things you can do to keep your solvency stable or increase it. We have listed the three most important ones for you.

1. Let your customers pay as quickly as possible. If they pay faster, you'll have money in your account faster. This is positive for your working capital and ensures that you do not need financing so quickly.
2. Optimise your inventory. Inventory Management is a big job, but it is important to do it. Money is stuck in stock. The less inventory, the less total power. If your equity remains the same and your total assets decrease, solvency increases.
3. Increase your profits. This sounds like an open door, but you can optimize a lot in this area. On the one hand, you can try to increase turnover and, on the other hand, you can see what costs can be reduced.

Is your company financially healthy?

Whether your company is financially healthy does not only depend on the solvency ratio. Also the liquidity and profitability are important to make a complete financial picture. Are you curious about the financial health of your company? We have 5 signals described from a healthy company. Are these signs familiar to you? Then you are busy!

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