How is solvency defined in financial terms?

Solvency in financial terms is defined as the ability of an entity to meet its long-term debts and financial obligations. This concept is crucial for assessing a business's financial health and stability over time. Solvency indicates whether a company can cover its liabilities not only in the short term but also in the long run, ensuring that it can sustain operations and avoid insolvency or bankruptcy.

Understanding solvency is essential for stakeholders, including investors, creditors, and management, because it provides insight into the overall financial viability of an organization. Companies that are solvent can invest in growth opportunities, maintain their operations during economic downturns, and secure better financing terms, thus contributing to long-term success.

While generating short-term cash flow, growing revenue, and managing financial risk are important aspects of financial management, they do not directly encompass the definition of solvency. Solvency focuses specifically on the ability to meet long-term financial commitments, which is a key indicator of financial robustness.