Cash Flow Insolvency and Balance Sheet Insolvency are two broad categories of insolvency. Both categories also have subcategories, depending on the specific kind of insolvency that is in play. A business that creates financial reports based on accrual accounting practices would be said to be balance sheet insolvent.
When a company holds more cash outflows than cash inflows, it will have a cash flow deficit (aka negative cash flow or negative cash flow). This can happen when a company pays more bills than it collects from customers.
Balance sheet insolvency describes a company's financial situation if liabilities exceed assets, despite having positive cash flows. This may occur when a company takes on more debt than it can pay back and the company has a negative net worth or net assets.
Most people know that a business can be "in the red" or "in the black," but what does that mean? What does it mean for a company to be "in the red," and how is it different from being "in the black"?
Knowing the answers to these questions (and knowing which is which) can be vital to understanding a business's financial health and why a company may be in financial trouble.
If a person's debts outweigh their assets, they are insolvent. Bankruptcy rules have developed to give a person or business a way to have their debts resolved. However, there are circumstances when a person is assumed to have taken their assets with them when they did file, resulting in significant liability for any remaining debts.
